COMMENT: If you’re a resident of Longburn in Manawatu, and own a cat, I trust that you have your pet under appropriate control. According to a law which is apparently still in force, Longburn cats must wear three bells around their neck while they’re roaming. Not one, not two, but three. You’ve been warned.
And this isn’t the only obscure law which still exists in statute in New Zealand. If you’ve found uranium within the past three months and haven’t reported it, you’re also in big trouble, although there’s an exemption for high schools, which are allowed to have one pound of uranium and one pound of thorium, for conducting experiments. But if there’s ever a nuclear explosion, your school will have to pay a $1 million fine. Frankly, that’s a bargain.
Not all silly laws are still in force. It is now legal to fly a kite, beat a rug in public or wear slippers in a public place at night. You’ll probably also be pleased to know that the implied consent for Protestants (but not Catholics) to bear arms for self-defence “suitable to their conditions” has now been removed, and that the driving of vehicles by goats and dogs has now been outlawed.
Inexplicably, malicious bell-ringing, which used to be an offence, is now OK and, even in the wake of the Cannabis referendum, being caught reading the book Everything Marijuana is punishable by up to 10 years imprisonment, which is a more severe sentence than actually being caught growing and selling the stuff.
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But let’s not get too smug about the passage of silly laws because the Government is about to add a new one to the list with the likely passage of legislation to extend the Bright Line test from five years to ten years.
Frankly this is a law looking for a victim and will achieve little other than to demonstrate that the Government has absolutely no idea how the property market works.
Let me explain.
The Bright Line test was introduced by the then National Government in 2015 to replace the old ten-year “intention” rule, which gave Inland Revenue discretion to tax capital gains made on property sales for up to ten years after the date of purchase if it was believed the property was bought primarily for resale purposes. The rule was loose and inconsistently used and National’s new two-year Bright Line Test tidied things up and gave certainty.
The rule recognised the difference between speculators, who buy property for short term gain, and property investors, who buy for the long term, by taxing them in a different way.
Speculators – also variously known as traders, flippers and renovators – come in two forms. At their best, speculators renovate a property during the short time that they own it, thus performing a social good by improving the quality of housing stock. At their worst, they simply buy, wait a few months, then sell, although this behaviour is generally confined to periods of very strong capital growth. Regardless, these people buy and sell in the expectation of making a capital gain and there’s no question that they should pay tax on this gain as this is their income and the purpose of their business.
The other way to run a property business is to become a landlord – or what we now generally refer to as a property investor. These people are overwhelming mums and dads who buy property for the long term, usually in an effort to provide for themselves in retirement. While there are no empirical figures on how long these people hold on to a property - my experience in the industry would suggest that the average would be around 15 to 20 years. As such, they are in the business of providing rental accommodation, an activity on which they are (and always have been) taxed on the rental income once a rental property starts making money.
For this reason, increasing the Bright Line Test to ten years is an act of lunacy. Whereas an investor holds for the long-term, a successful speculator is likely to be in and out of a house in less than a year because the holding costs of retaining a property longer than that would erode their profit margin.
Despite this, the Government looks set to persevere with this change which will impact on nobody except a handful of investors, thereby forcing these people to pay tax twice - an act which breaks every principle of international tax law. It certainly won’t affect any speculators who will have long since quit their properties almost a decade earlier.
By the way, the Bright Line Test is a capital gains tax, something the Prime Minister, Jacinda Ardern, promised not to preside over during her leadership. So, it’ll be interesting to see what sleight of hand is used to justify that.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
