1. Property Tax Article 2
The release of the government’s issues paper on the bright-line test for sales of residential
property raises multiple questions around the clarity, fairness and effectiveness of the new rules.
Clarity
The new legislation adds considerable complexity. More complexity typically leads to more errors
and non-compliance.
One example of the increased complexity is the different dates for sale and acquisition of the
same piece of land. There are actually four dates involved in the normal process of purchasing
and selling land:
1. The date the contract to buy the property is drawn up.
2. The date (typically around 6-8 weeks later) the purchase contract is “settled” and the
change in title registered.
3. The date the contract to sell the property is drawn up.
4. The date (typically around 6-8 weeks later) the sales contract is “settled” and the title
registered.
Somewhat arbitrarily, the IRD has suggested that the date of acquisition is the date that title is
registered for the purchase of the property (point 2 above) and the date of disposal is the
date that a person enters into an agreement for sale and purchase for the sale (point 3
above).
These details may be understandable to a seasoned investor, but perhaps not to the novice.
The average home owner probably thinks of the settlement date as the actual date of
purchase rather than the date the contract was drawn up. Why complicate matters by
choosing a date property buyers will find counterintuitive? Why not simply use the date of
unconditional agreement as both the acquisition and selling date?
Fairness
Continuing on the date of acquisition, consider this scenario. A contract to purchase a house is
drawn up on 01/01/2016. The settlement then occurs on 01/03/2016.
Some months later the house is sold due to changing circumstances. The contract is drawn up on
15/01/2018 but is settled 15/03/2018.
From purchase settlement date (01/03/2016) to sale settlement date (15/03/2018), the date
most home owners focus on, the house has been owned for 24 ½ months. From the IRD’s
perspective however, the house was only owned for 22 ½ months, from 01/03/2016 - 15/01/201,
and is thereby liable for the new tax. Is this either clear or fair for a novice investor?

2. Further, this scenario could result in interest being charged by the IRD on taxes owed before the
money has been received by the investor.
Other questions arise around fairness. The issues paper specifically states the new legislation “will
make a sale of residential property taxable… when a person needs to sell property due to
circumstances outside of their control”. How can punishing investors due to circumstances
outside of their control be fair?
This patchwork policymaking has the effect of benefitting the most knowledgeable sellers while
setting up novice sellers for trouble. Knowledgeable sellers will plan purchase and sales around
the rules. Other may well be caught out.
Effectiveness
In addition to encouraging non-compliance through increased complexity, how is the legislation
likely to actually affect the market?
- Will prices be put up as investors aim to recoup the cost of the tax?
- Will bigger deposits be required if affected sellers need to pay tax on their previous sale?
- Will rental investors look to other, less complex investment markets, thereby reducing the
available rental stock?
- How many investment properties will be now be put in the name of the lower-earning
spouse to utilise lower tax rates?
- How many investment properties will be now be put in the name of other family
members who don’t own property in order to avoid the main residence rule?
- How many tax investment properties will now be purchased through a company to
maximise deductions?
The new legislation also raises a variety of definition questions, particularly around mixed use
land.
The date of application of the new law is fast approaching. These questions, and many others,
need to be addressed quickly if we are to avoid slipping into the byzantine tax systems that exist
in many other OECD countries.