The recently proposed bright-line test has been criticised as unfair with the New Zealand Law Society saying it will detrimentally affect local taxpayers who need to quickly sell property within two years of purchase due to unforeseen personal circumstances.
While the bill itself is intended to target real estate speculators failing to meet their income tax obligations, Stephen Tomlinson, spokesman for the NZ Law Society, said that ordinary taxpayers were more likely to be negatively affected.
Impacts were possible for those who didn’t fall within an exception such as selling their primary home or inherited property or transferring a property under a relationship property agreement.
“It is likely that the proposed bright-line test will subject the sale of land to tax where the taxpayer genuinely did not have a purpose or intention of disposal at the time of acquisition,” Tomlinson said.
“However it will not catch speculators who are currently not meeting their income tax obligations, as they will simply change their behaviour so that land will not be disposed of within the two-year period.”
Officials have criticised the current disposal test in section CB 6(1) of the Income Tax Act 2007, saying it is too difficult to enforce due to its subjective conditions. They claim the bright-line test will do away with this issue.
However, the Law Society says the burden of proof for the new test will fall on the taxpayer involved and not on the Commissioner.
“The proposed test should not be enacted as it is likely to be ineffective in achieving its stated objective,” Tomlinson said. “If officials are concerned about difficulties in enforcing the existing land gain taxation provisions, then there should be a comprehensive review of those provisions, rather than reform being made on a piece-meal basis.”
The Society also says the proposed test is unnecessary because new property disclosure rules introduced by the Land Transfer Amendment Bill and the Tax Administration Amendment Bill will ease enforcement of the current land sale rules anyway.
Tomlinson also criticised the limited timeframe and lack of consultation behind the proposed legislation, saying discussion of the potential effects deserved more time.
“We strongly recommend that the period for making submissions is extended so that proper consideration can be given to reforms that could inadvertently affect so many,” he said.