Happy 2018! (This is the first article in 2018).

Recently, the revenue minister Stuart Nash announced that the bright-line test on residential property sales would be extended from 2 years to 5 years. The government claimed that the extension would reduce the property speculation behavior and make homes affordable.

The bright-line test was introduced in October 2015. The purpose is to tax all residential property investors (both NZ and overseas) for the capital gain if the disposal is done within 2 years from the date of purchase. According to the law, this is not limited to NZ properties only, which means if you are an Aussie expatriate or a Kiwi repatriate owning residential properties in Australia and you sell it within 2 years from the date of purchase, you may be captured under the bright-line test.

In my opinion, the bright-line test cannot make homes affordable. In fact it may make the problem worst. It shouldn’t exist at all:

• The property price is depending on the basic supply-demand theory. More supply and less demand, in theory, should bring the price down. The bright-line test would reduce the supply because people would hold the property for more than 2 years in order to avoid the tax. The extension from 2 to 5 years would reduce the supply further. The demand may not be affected by the bright-line test – Investors do not need to pay any tax at the time of purchase. Investors can avoid the bright-line test easily by not selling the property.
• It has many side-effects. The bright-line test provides exemption to NZ commercial property but does not provide any exemptions to overseas property, which does not make any sense at all. Kiwi expatriates or foreigners holding oversea residential property may be captured unintentionally by the bright-line test. The extension from 2 to 5 years would make the problem worst.

New Zealand is going to the wrong way as the work should be done at the purchasing side in order to reduce the demand. A stamp duty is what they should have introduced, not the bright-line test, which is an extremely simple version of Capital Gains Tax. A stamp duty is better because it taxes property purchaser AT THE TIME OF PURCHASE so it can reduce the demand and have less impact to the supply (usually the stamp duty is paid by the purchaser, not the seller). The stamp duty rate can be varied depending on the status of the purchaser. For example, there can be an exemption if the property is purchased for self-use. A reduced rate can be applied to NZ investors and a heavier rate can be applied to foreigners.

It is also very important to stop foreigners to buy any existing NZ properties. The government is working hard on this part but still not very sure if they are going to follow the Australian’s treatment.