Tax changes around property

We know Labour intend to extend the “bright line test” that taxes the profits made on the sale of residential properties, other than the family home, from land owned for less than two to five years, intending to catch people who flip investment properties. As the “bright line test” is already included in the Income Tax Act this is a reasonably simple change to make, however it potentially has significant implications. Already we are seeing the two year “bright line test” get in the way of legitimate family reorganisations so a five year test will undoubtedly cause issues in these areas. Also peoples circumstances change and properties will be sold within five years for legitimate reasons such as health or a change in circumstances.

Labour has also said they will stop negative gearing on rental properties. Negative gearing occurs where expenditure (generally interest) exceeds income from the property resulting in a tax loss. Currently this loss can be offset against other taxable income, thereby reducing a taxpayers overall tax liability. Labour has viewed this as a tax incentive gained through property speculation, whereas in reality the expenses are a true cash costs to the taxpayer meaning if there is a $10 tax benefit someone has truly spent $30 cash (remembering that there is 0% depreciation on buildings now). Rules to prevent negative gearing are likely to be complex and may not result in the intended outcome. The mischief that Labour are concerned about here seems to be the fact the taxpayer has a tax loss from the property while they may have made a tax free gain from an appreciation in value!

A potential Capital Gains tax (other than the initiatives outlined above) will be left to a Tax Working Group, with recommendations taken to the electorate in 2020.

Obviously as more information comes to hand we will keep you updated.