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Bright-Line Test Changes

Bright-Line Test Changes

It is not just the NZPIF claiming potential problems with the law change, writes Andrew King.

By: Andrew King

28 February 2018

Property Investor Associations educate investors to buy and hold their rental properties for the long-term. It is a shame that Labour are pushing ahead with increasing the bright-line test from two to five years, but it isn’t the end of the world for most of us. However, it does show their lack of understanding about the difference between speculators/traders and rental property providers. In addition, it will not help increase the supply of rental properties for tenants.

To clarify, anyone in the business of buying and selling property is required to pay income tax on their profits. Note that this is an income tax, not a capital gains tax. This is exactly the same as share or commodity traders.

The bright-line test was introduced, by the last Government, to stop property traders and speculators from claiming they were rental property providers to avoid paying income tax on their earnings. While it has an effect on genuine rental property owners, it is not hard to see why it was introduced. However, this does not mean that increasing it to five years makes it a better law.

The Government claim that the extension will help dampen property speculation and make homes more affordable. It is difficult to see how this will be achieved.

‘All those in the business of buying and selling property are required to pay income tax on their profits’ ANDREW KING

Property speculators and traders make their profits from turning over property quickly. Holding costs tend to eat into profits and are not good for cash flow. Because of this, virtually all traders and speculators are already prevented from avoiding income tax by the current two year bright-line test. Therefore, speculators/traders are not going to be affected by this new law.

It is encouraging that it is not just the Property Investors’ Federation claiming potential problems with the law change. Inland Revenue and Treasury officials say that, “there was a risk that rents could rise if the law change reduced the number of investors buying and renting out property”.

They also repeated a point that the NZPIF has been making about the transfer of rental properties to owner-occupants causing a shortage of rental property supply. The officials claimed that, “A higher level of home-ownership among former renters is unlikely to completely offset the pressure on rental prices. This is because owner-occupied homes typically have a lower occupancy rate than rental homes. So, the reduction in the supply of rental housing (caused by some investors exiting the market) will probably outweigh the reduction in demand for rentals (as some renters purchase homes).”

While the majority of investors will not be affected by this change, it could adversely affect some whose circumstances change. Should an owner lose their job, or become seriously ill they may be unable to keep their rental and be forced to sell when they otherwise would not want to. They would then be forced to pay income tax on the increased value of their rental.

As this would not happen if the individual owned any other form of investment, it appears grossly unfair to rental property owners. For this reason the NZPIF will be advocating that if the new law has to be introduced, it should at least have a hardship clause included in it. A lot can happen over a five year period.