IRD cracking down on property sales
While New Zealand does not have a comprehensive capital gains tax, we do have a capital gains tax in relation to property known as the bright-line test. The bright-line test provides that properties sold within 5 years of acquisition are subject to tax. The test was established in 2015 as a 2 year test but was raised to 5 years in 2018. There are certain exemptions for the main home, and transfers due to death or pursuant to a relationship property agreement.
Recent statistics have shown the Government that compliance with the bright-line test is only at 75% and, as we anticipated, Inland Revenue is now cracking down on enforcement in a big way. It is likely that is in part due to increasing attention and concern surrounding escalating house prices in New Zealand. The Government has cited the extension of the bright-line test from 2 to 5 years as something they have done to address the house price issues, and Inland Revenue believes increasing enforcement will further assist.
As a result of this recent crackdown, many people are now receiving letters from Inland Revenue informing them that the sale of their property is subject to the bright-line test. Some letters advise that this is to be returned in the next tax return, and others are showing as being overdue (due to the sale occurring in the previous tax year. These letters can be alarming to receive and cause a lot of stress. However, taxpayers should not automatically accept Inland Revenue’s decision on this.
In some circumstances, Inland Revenue may not have all of the relevant facts before making their decision. In instances like long settlements where the property has been purchased off the plans, or where it is unclear that a property actually falls under the main home exclusion, Inland Revenue can come to a wrong conclusion without the full picture.
One circumstance where we are seeing people caught out and receiving poor advice is when they have purchased bare land and built on that land, lived at the property as their main home, and then sold the property. In these cases the main home exemption may not apply, and it is necessary to review the facts and the legislation before providing advice. Many people are being incorrectly advised that they are able to rely on the exclusion in these circumstances.
Taxpayers who are concerned should seek specialist tax advice to review the facts of their case and correctly apply the law. Simply accepting Inland Revenue's decision could result in a lot of hard-earned money to pay unnecessary taxes.
If you have not returned the correct taxes, then you should complete a voluntary disclosure. The voluntary disclosure process is a legal process that provides protection from any shortfall penalties that the Commissioner of Inland Revenue might seek to impose as a result of the unpaid tax. Low-end shortfall penalties are reduced to zero for a pre-notification voluntary disclosure and other short-fall penalties are reduced by 75% for a pre-notification voluntary disclosure.
If you receive one of these letters, or need tax advice, contact our tax team.
Please note that the bright-line test has been updated. For more information, see the following Property Investors Hit Hard by Tax Reforms.