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Law Society identifies problems with "bright-line test"

23 September 2015

The New Zealand Law Society is concerned that the proposed two-year "bright-line test" for sales of residential property will unfairly catch ordinary taxpayers who need to sell property within two years of purchase because of changes in their personal circumstances.

While the proposed Taxation (Bright-line Test for Residential Land) Bill is intended to target speculators who are not meeting their income tax obligations, ordinary taxpayers are more likely to be impacted, provided they don't fall within an exception, New Zealand Law Society spokesperson Stephen Tomlinson has told the select committee hearing on the bill.

The exceptions include the sale of an owner's main home, inherited property and the transfer of property under a relationship property agreement. 

"It is likely that the proposed bright-line test will subject the sale of land to tax where the taxpayer genuinely did not have a purpose or intention of disposal at the time of acquisition. However it will not catch speculators who are currently not meeting their income tax obligations, as they will simply change their behaviour so that land will not be disposed of within the two-year period."

Officials have justified the introduction of the bright-line test, saying the disposal test in section CB 6(1) of the Income Tax Act 2007 can be difficult to enforce due to its subjectivity. However, the burden of proof in such matters falls on the relevant taxpayer and not the Commissioner, the Law Society says.

"The proposed test should not be enacted as it is likely to be ineffective in achieving its stated objective. If officials are concerned about difficulties in enforcing the existing land gain taxation provisions, then there should be a comprehensive review of those provisions, rather than reform being made on a piece-meal basis."

The bright-line test is also unnecessary because the new property disclosure rules introduced by the Land Transfer Amendment Act 2015 and the Tax Administration Amendment Act 2015 (formerly the Taxation (Land Information and Offshore Persons Information) Bill) will make enforcement of the existing land sale rules much easier than at present.

Given the potential effects of the proposed legislation, Stephen Tomlinson has also taken issue with the limited time frame and lack of consultation. He says a call for submissions was made on 9 September, yet submissions were due on 17 September, with a proposed enactment date of 1 October 2015.

"We strongly recommend that the period for making submissions is extended so that proper consideration can be given to reforms that could inadvertently affect so many."
The select committee is due to report back to the House on 22 October.

The Law Society submission is available here and spokesperson Stephen Tomlinson explains the Law Society's position in a video which is available here.

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Last updated on the 23rd September 2015