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Doubts over bright-line test efficacy

29 July 2015

The New Zealand Law Society has doubts about whether the proposed two-year "bright-line" test for sales of residential property will catch the taxpayers it is intended to target.

In comments to the Inland Revenue Department on the Officials' Issues Paper The Bright-line test for sales of residential property, the Law Society says the target appears to be those taxpayers who buy and sell a property within a short period of time but maintain that it was not acquired with a purpose or intention of disposal.

"It is doubtful, however, that the proposed bright-line test will solve this issue," the Law Society says.

"Property speculators of the kind targeted by the issues paper are likely to change their behaviour so that property is held for more than two years prior to disposal."

The property owners most likely to be caught by the new test will be those taxpayers who need to dispose of property within two years of acquisition for reasons not contemplated at the time it was acquired, the Law Society says.

As examples it points to taxpayers whose personal situation changes since acquiring the property, those whose employment changes and requires them to relocate, and those whose financial circumstances change after acquiring the property.

The Law Society says taxpayers in one of these situations are presumably not the target of the proposed reforms "but are the ones most likely to be impacted".

It says the proposed bright-line test won't catch property speculators who are currently not meeting their income tax obligations as they will simply change their behaviour so that property will not be disposed of within the two-year period.

In its comments, the Law Society also says it is surprising that officials say the disposal test in section CB 6(1) of the Income Tax Act 2007 can be difficult to enforce due to its subjectivity. This has been used to justify introduction of the bright-line test.

However, the Law Society says the burden of proof in such matters falls on the relevant taxpayer and not the Commissioner.

"If the Commissioner considers there is sufficient evidence to make an allegation that a taxpayer has acquired property with a purpose or intention of disposal (sometimes referred to as discharging the 'evidential burden'), the burden of disproving the Commissioner's allegation falls on the taxpayer," it says.

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Last updated on the 29th July 2015