18 May 2015

Overseas investors 'unaffected' by new tax

6:15 pm on 18 May 2015

While some believe that the new tax on capital gains on houses sold within two years will have little impact on overseas or professional investors, others say it is not as clear-cut as it may seem.

The Government has announced that from October capital gains on residential properties bought and sold within two years will be taxed. The measure will not apply to family homes, death estates or properties sold as part of a relationship settlement.

Shane Allen, a long-term professional investor who manages about $6 million worth of property across the country, is not concerned by the measure.

"It won't affect us at all, because the properties that we do buy and sell we basically declare it ... and just pay tax on that anyway, and we're quite happy with that.

"I think it will that actually put a lot of people off that actually don't know the real ins and outs about property investing, because they will deem it as a mini-capital gains tax."

However, a former Inland Revenue Department executive has doubts the Government's move to tighten the tax rules will work, and said people would regret it in the long run.

Robin Oliver spent 16 years as the deputy commissioner of policy at the IRD, and now runs a firm specialising in tax economics and policy.

Mr Oliver said the new so-called bright line tax test for property investors might seem clear cut, but it would become enormously complicated.

Home for sale

Photo: RNZ / Diego Opatowski

Under the new policy, non-resident buyers will have to provide a tax identification number from their home country, along with identification such as a passport, and have both an IRD number and a New Zealand bank account.

Chinese clients investing for the long term?

Tightening tax on capital gains on houses sold within two years will not affect many of those investing from overseas, a financial advisor says.

Auckland-based financial adviser Becky Bi said her clients, mostly from China, were investing for the long term and buying before prices rise further.

"I don't think it will affect them at all because either their children will come to New Zealand to study here, and some of them [are] planning to migrate to New Zealand."

Ms Bi said her clients were often attracted to New Zealand because it was easier to migrate here compared to the United States, Canada, and Australia.

But property and commercial lawyer Vivian Zhang said investors may refrain from buying because the looming tax had created market uncertainty.

Ms Zhang, whose clients are mostly Chinese, said she was unsure whether the new tax will actually affect house prices.

'Tinkering around the edges'

At the moment people who buy and sell houses can be taxed if the IRD can prove they wanted to make a capital gain from the transaction - the current "intentions" test. The new measure introduces certainty they will be taxed if they sell within two years, whether or not they intended to make a gain from the sale.

Infometrics economist Benje Patterson said two years was not a long time in this context and the move did not solve longer-term structural issue of a shortage of houses.

"It is tinkering around the edges," he said. "It will limit some upside but at the end of the day we need to look at measures that support increasing supply."

John Shewan of Victoria University's business school said excluding the family home from the tax changes meant they would not affect rising house prices.

"The real elephant in the room is family homes," said Mr Shewan, a former chairman of PricewaterhouseCoopers.

"If you wanted to change house prices you should tax all homes including family homes.

"Now, nobody's going to do that, or they wouldn't survive as a politician."

Tax consultant Terry Baucher said IRD was seeing a lot of short term selling and the measures will make its job easier, though the effect will be difficult to measure.