23rd June, 2021
A hallmark of NZ’s taxation system has long been the absence of a Capital Gains Tax on the sale of property, but is that strictly still the case?
A new client of mine is upset about having to pay tax at 39 percent on the sale of a property, saying that when he immigrated here he was told NZ doesn’t have a Capital Gains Tax (CGT), such as you might find in Australia.
Is he correct, does NZ have a CGT on property? In this article, I’ll explore the concept of taxation on the sale of properties, including nine ways you can get taxed on its sale even if you’re not using it for business or to rent out to tenants.
Keep in mind, while none of these situations may apply to you now, they’re handy to keep in mind for the future, should your situation change.
You’ve always wanted a new house so you buy a section. Under the new rules, if it takes you longer than a year to build and move in, then the apportioned gain on sale over the time before you move in will be taxable.
The real gotcha is, as far as I can tell, there’s no way you can get consent and build a house in less than a year in NZ, it just cannot be done.
You get a great job offer in Taumarunui for 18 months. Guess what? Any gain on your house upon sale over that 18 months, averaged out over the total period of ownership, will be taxed.
You inherit a property from your mother jointly with your sibling. Your sibling has been in the UK for many years and can’t be bothered with the property, so you buy out your sibling’s share.
When you eventually come to sell the family house, the share of the property you brought from your sibling will be taxable.
Due to the current state of the economy, infrastructure and the cost of living, your adult children are struggling to be able to afford a house.
So you help out, taking a share, either in your own name or in the family trust. Guess what? When the property is sold, you end up with a tax bill in return for your good will.
You’ve never wanted the hassle of owning a rental property but you do own a small family bach at Foxton Beach. It’s a long way away, so it’s difficult to maintain, so to prevent any further deterioration of the property, you decide to sell up.
Much to your surprise, you find that property prices in the area have doubled, so you end up paying 39 percent tax because the gain on sale is added to your normal income.
You have a lifestyle block and are too busy to own your own livestock, so you let the neighbour use the paddocks to graze their daughter’s horses.
Unbeknownst to you, this means you are using less than 50 percent of the property, which means you end up paying tax on the sale.
Because your child is studying to be a doctor, they are going to be studying in another city for many years and finds sharing a house makes it difficult to study.
You decide to buy a small apartment for your studious offspring to live in for the duration, knowing you’ll need to sell it once graduation day comes around.
Because you bought the property with the definite intention of resale, the Inland Revenue stipulates you should pay tax on the gain.
You decide to move to Taranaki to be closer to your partner. Things don’t work out, so you move back to Wellington. Turns out you now have the neighbour from hell, so after a short period you have to move again.
After a short while in the new house, interest rates go through the roof, so you can’t afford the mortgage, which means you have to sell up. Inland Revenue says that, because you have had three properties in just a few years, you have a regular pattern of buying and selling property, so have to pay tax on their sale.
You meet a new flame online (who happens to be a property developer) and move from Auckland to Hawke’s Bay.
To make for a smooth transition, you opt to sell your Auckland property, but decide to hedge your bets by purchasing a smaller place in Auckland, just in case.
When you come to sell the property you find that, because you are associated with a property developer, the proceeds of sale are taxable.
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The current rules on the sale of property are piecemeal and messy.
Recent changes to property tax, which came into effect on 1 April 2021, are still being consulted upon, how crazy is that?
In my view, if you have to tax property, it would be much better if a properly thought-through and better-structured, standalone CGT was introduced.
Why not copy the best bits of the UK and Aussie CGT regimes? After all, they are tried and tested, having been in place for many years. Keep it simple and practical, and there’s no reason why it wouldn’t work to everyone’s benefit.
The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced professional. Start your search for a specialist advisor near you today.