A battle over tax on a Southland woman's capital gains highlights the election debate over fixing 'inadequate' bright-line test policy settings, says advisor.
Inland Revenue is demanding a Gore woman pay tax on the income she's earned from selling four houses in quick succession – but she is fighting back, saying each house has been her home.
Once, she says, she moved to be closer to her mother, once to a warmer dwelling, once because her neighbours were drug dealers, and once because she lost her job as a heavy machinery driver.
The middle-aged woman hardly seems a hard-nosed property investor: she gained just $50,000 on the last sale, and half that was gobbled up by real estate commissions. "It’s not like I was making millions," exclaims Wendy, who asks to be identified only by her first name.
Now, she and her tax adviser are welcoming National's election policy: to roll back the bright-line test from 10 years to two years, as well as restoring the ability of residential property investors to write off the interest they pay on their mortgage against tax on their income.
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"I just feel like I've got this big black cloud over me because I was just trying to get a home and get ahead," Wendy says. "From Inland Revenue's point of view, I'm trading for profit, but the thing that annoys me is they don't look at any of your personal circumstances.
"When Auckland house prices started going through the roof, a lot of people started looking at the South Island in places like Invercargill and Gore, because houses were relatively stable. There were some of the cheapest prices in the country."
Findex tax partner Craig Macalister says his company's client purchased and sold the four houses for differing personal reasons, but each was her main home – and so she shouldn't be taxed on the capital gains she made on the house sales. "The properties are not flash nor high-end," he says.
"All her funds have gone back into her houses. She has not profited from the sales in any way which would give rise to a tax liability other than under the blunt, ill-targeted bright-line rule."
"The policy settings are inadequate. When people are obliged to sell their house because, for example, they lose work, they should not be taxed." – Craig Macalister, Findex
That said, he acknowledges National's policy change won't help Wendy personally, as she sold her last home within two years – but it's a step towards unwinding the crude test for others.
Under the bright-line test, somebody who buys and sells a residential property within 10 years can be taxed on their gains. But there's an exemption for those selling their main home.
"Inland Revenue maintain she is not entitled to the main home exemption because she developed a pattern of buying and selling main homes," Macalister says. "We have disputed there is a pattern.
"At the end of the day, regardless of who is right, the policy settings are inadequate. When people are obliged to sell their house because, for example, they lose work, they should not be taxed.
"We are pushing on with the dispute on behalf of our client as we feel we have the better argument, but there is a bit of water to go under the bridge yet."
“It is ripping money away from everyone else in order to support the wealthiest few, and will be the worst possible news for first home buyers who want to be able to buy a place to put down roots.” – James Shaw, Green Party
This week, National announced that if it were elected, it would unwind the Government's changes to the bright-line test.
The test – which has become a de facto capital gains tax on investment properties – requires that residential property owners pay tax on any profit from disposing of residential land that they've owned for less than 10 years.
Green Party co-leader James Shaw criticised the plan as a “handout for property speculators”.
“It is ripping money away from everyone else in order to support the wealthiest few, and will be the worst possible news for first home buyers who want to be able to buy a place to put down roots.”
Initially, when the John Key National government introduced it in 2015, the threshold was two years. In 2018, the Labour government extended it to five years – and then in 2021, extended it again to 10 years.
"I've spoken to those landlords, many of them are extremely good to their tenants. They have worked really hard to try and keep rents affordable during a cost of living crisis." – Nicola Willis, National Party
This week, National finance spokesperson Nicola Willis says the bright-line test has become "a capital gains tax by stealth".
She promises to return it to just two years. "It has ended up capturing family homes of cancer patients, and people affected by natural disaster."
National's policy would change the guidelines, effective from July 2024, so anyone who bought a property before July 2022 would no longer be liable for the tax.
"There's a choice here," Willis says. "The choice is that costs are added on to landlords over the next few years by Labour. And I've spoken to those landlords, many of them are extremely good to their tenants. They have worked really hard to try and keep rents affordable during a cost of living crisis.
"But they are at breaking point. They've said to me, look, if the costs keep going up I'm going to have to hike my rent. So the choice is clear. We're going to take that pressure away, so they won't have to make those difficult choices for their tenants."
National leader Christopher Luxon said the proposed law change would put downward pressure on rents, making sure landlords passed on their tax savings to tenants.
He wouldn't say how the Government could apply that pressure: "All I can say to you is the counterfactual is, if you keep it in place, you'll end up driving up rents."
Craig Macalister says the proposal to roll back the bright-line rules is to be welcomed. "The rules were more aptly targeted at property that was potentially speculative in nature," he says. "The extension to 10 years came with a raft of additional complexities that created unnecessary tax traps and compliance costs.
"The arbitrary nature of the bright-line rules gives rise to tax outcomes that should not have happened, and the extension of the bright-line to 10 years exacerbated this. Though the bright-line rules were enacted with the best of intentions to better capture property speculators, they remain imprecise.
His company has acted for clients caught by the bright-line test for a variety of reasons, such as loss of employment, that have them to sell their property. "The bright-line rules are very unforgiving in that context. They need an out for change of circumstances.
"Their arbitrary and poorly targeted nature combined with the design of the main home exception means rules are unfairly catching out everyday property owners who had no intention to profit from a land sale."
