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Bright-Line Extension Consequences

With upward pressure on house prices, the Government has signaled more change is coming. By Mark Withers.

By: Mark Withers

1 March 2021

More changes to the tax system will supposedly address the demand side of the residential property equation.

But given they have ruled out a capital gains tax and have already stripped away traditional deductions like depreciation, it’s likely to be back to the future with an uninspiring increase in the bright-line as the front runner for change.

It seems a move to a ten-year brightline from the current five will be the chosen lever as this would align with the existing ten-year hold rules in the taxing provisions that deal with developers, traders and builders on “other land”.

But a move to a ten-year bright-line is something the Government really needs to think through. When National introduced the two-year bright-line it was simply to strengthen the “purchased with intention” rules that had proven unenforceable.

The subsequent move to a five-year bright-line by Labour has of course proven utterly ineffective as a measure to reduce demand for property. A move to a ten-year bright-line, would, in my view, deliver the exact opposite of what the Government is hoping to achieve.

Buyers contemplating residential property as a retirement investment will not be deterred by an extension of the bright-line. On the flip side, those who already hold property or do buy, will think long and hard before bringing property to market that they otherwise would have.

A ten-year bright-line is a very different beast than a two-year one and will alter behaviours in ways the original bright-line was never designed to.

Unintended Consequences

Consider some of the unintended consequences of extending the brightline. At present, there is no exemption from bright-line for transfers of property between associated parties. Helping children into property often involves parents using trusts to hold property or parents going onto titles with their children in partnership to retain some control. Adult children now live fast-paced lives and change is inevitable over a decade; selling or changing ownership of property like this acquired for family reasons will be highly problematic under an extended bright-line. No main home exemption exists for the homes lived in by a trust’s beneficiaries, escape is only offered to the trust’s principal settlors: the parents.

The bigger the gain and the closer an owner is to the end of the bright-line date, the less likely they will be to bring a property to market before the bright-line ticks over. They will simply fold their arms and hold that property to avoid the tax a sale would trigger. If a property is not currently bright-line impacted there is still an increased reluctance to make any change if bright-line is then reset.

Real issues lie ahead for “unintended landlords” - those that opt to retain a previous home as a rental and borrow for a new home to live it. Traditionally, a straight forward restructure was done to ensure appropriate structuring of such an arrangement was in place, but, if bright-line is extended further, people will be forced to weigh up the perils of resetting against the benefits of making sensible structuring decisions.

All of this will create paralysis by analysis to decisions that might have otherwise freed up property for sale or sensible restructure. An extended bright-line therefore is likely to limit the future supply of property coming to market as owners simply hold assets because their assessment is that triggering tax on a sale gain is far worse than the consequence of simply holding onto a property.

No doubt officials have warned the Government that a bright-line extension and its unintended consequences could well and truly backfire if their goal is house price decreases but despite this, the desire to score cheap political points by making the lives of property investors more difficult by introducing measures
that simply will not work and are easy rather than sensible seems to be the order of the day.

Genuine disincentives to buy, such as in Australia, where for many years there has been imposed targeted stamp duties on property acquisition, are far more effective, and even ensure foreign buyers pay more than Australians.

Stamp duties may also actually result in predictable government revenues that could be used to reduce our Covid-19 deficit or actually build some of the affordable first homes that were promised, but never delivered.

Whilst property investors would rally against stamp duties, the current plan to keep extending the same things that aren’t working and expecting a different result is utter madness.

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