Housing and Property Update

The government is introducing two significant reforms that will affect property transactions and rental properties, including those owned by trusts.

IRD numbers and capital gains

Currently, anyone who buys a property with the intention of selling it for a gain is liable for tax on any gain.  However, if Parliament passes the Taxation (Land Information and Offshore Persons Information) Bill, new laws will apply to property transactions from 1 October 2015 to make it easier for Inland Revenue to identify who should be paying tax on gains.

How does this affect me?

The government aims to have the new laws in place by 1 October 2015.  However, this is subject to progress through Parliament.

If the law passes and you are planning on buying or selling a property that is not your main home you will need to ensure you have an IRD number.

If your trust intends to buy or sell a property, the trust must provide an IRD number even if the property is the beneficiary or settlor’s main home:

  • The IRD number will be the trust IRD number not the trustees’ numbers.
  • This will apply to all trusts engaging in a property transaction, even if the trust does not generate income through the property. The trust will have to file annual tax returns declaring any income earned from the property and, should the property be sold, the capital gain.

What is the current law?

If you buy a property to generate ongoing rental income and without any firm intent of resale, you are an “investor” for tax purposes.  You pay tax on your rental income. The property is a capital asset and is not taxable on resale (apart from clawing back any depreciation).  Although you may buy and sell properties, if your investment is based on the rental income and any capital gains made on the sale is incidental, the gains are not taxable.

If you buy a property with the intention to resell, you are a “speculator” for tax purposes and if you buy and sell properties regularly, you are a “dealer”.  Speculators and dealers must pay income tax on any profits from the sale and losses may be tax deductible. Rental income is also taxable.

There is no threshold for the number of properties you buy and sell to fall within the category of “speculator” or “dealer”, or the timeframe in which you do so.  Inland Revenue looks at your intention when you bought, your previous history, and whether you are associated with any builders or developers.

What are the new laws?

The Bill introduces a new bright line test to determine who should pay tax on capital gains:

  • Capital gains from all residential property sold within two years of purchase will be taxed, unless the property is the seller’s main home, inherited from a deceased estate, or transferred as part of a relationship property settlement.
  • The main home exemption may not apply to family homes owned by trusts in certain cases.
  • This will only apply to property purchased on or after 1 October 2015.
  • If a person has relied on the exemption at least twice in the preceding two years, the person will not be able to rely on the “main home” exemption.

The Bill also requires the supply of IRD numbers to keep record of buying and selling patterns:

  • Anyone buying and selling any property other than their main home must provide a New Zealand IRD number.  Those who are a tax resident in another country must also provide their tax identification number from their home country.
  • Non-residents must have a New Zealand bank account before they can get a New Zealand IRD number.

Rental property changes

The government is introducing changes to the Residential Tenancies Act to improve living standards for tenants.  Among other changes (expanded below), working smoke alarms will be compulsory in all rental properties from 1 July 2016 and underfloor and wall insulation will be compulsory in all rental properties from 1 July 2019.

How does this affect me?

The changes will affect all residential rental properties including accommodation provided to farm employees, contract milkers and sharemilkers (these are known as “service tenancies”).

You should ensure that your rental properties meet the new smoke alarm requirements and ensure that you know what insulation is currently fitted in your properties.

If your rental property will not meet the insulation requirements you should enquire about the subsidies available.  District councils offer targeted rates for retrofitting insulation – the cost is added to your annual rates so you don’t have to pay upfront.

The government also provides subsidies through the Warm Up New Zealand: Healthy Homes programme.  The government has budgeted for this until June 2016. Eligibility for the scheme requires that:

  • The house was built before 2000 and the head tenant has a Community Services Card; and
  • There are children under 17 years, adults over 65 years, or someone with high health needs living in the home.

If you do not qualify for any subsidies, you should start thinking about who will pay for the cost of installing insulation.  For tenants, the costs incurred by the landlord may result in increased rent.

Summary of the key changes

  1.    Compulsory smoke alarms
  • A new requirement for smoke alarms in all residential rental properties from 1 July 2016.
  • Long-life (10-year) photoelectric alarms will be required where there is no existing alarm or when replacing an existing alarm.
  • Houses will require a working alarm in the hall or similar, within three metres of each bedroom door.
  1.    Insulation requirements
  • All landlords must state in tenancy agreements the level of ceiling, underfloor and wall insulation from 1 July 2016.
  • New requirements for ceiling and underfloor insulation in residential rental properties will apply from 1 July 2016 for all government-funded social housing and from 1 July 2019 for all other rental properties.  The exemptions are:
    • Where it is physically impractical to retrofit insulation due to the building design;
    • Properties sold and rented back to the owner-occupier for up to 12 months;
    • Properties where the landlord intends to demolish or substantially rebuild the building within 12 months from the start of a tenancy.
  1.    Protection against retaliatory notices
  • Tenants will have 28 days (instead of 14 days) to apply to the Tenancy Tribunal to prevent an eviction notice given by the landlord in response to a tenant exercising their rights (“retaliatory notice”).
  • Retaliatory notices will be unlawful and landlords will be fined up to $2,000 for issuing a notice.
  1.   Enforcement powers
  • New powers for the Ministry of Business, Innovation and Employment to take enforcement action against landlords where there is significant risk to tenant health and safety.
  1.    Fast-tracked abandonment process
  • A new 10-day process to enable re-letting of properties where a tenant abandons a property:
    • Where rent is in arrears for at least 14 days, landlords may enter a rental property after giving 24 hours’ notice to confirm a reasonable suspicion that the property is abandoned.
    • The Tenancy Tribunal will hear applications from landlords to end the tenancy within 10 working days.

The changes are designed to incentivise landlords to improve living conditions and reduce health costs associated with living in substandard accommodation.

For general information on tenancy issues, see the Ministry of Business, Innovation and Employment’s new tenancy website: http://www.tenancy.govt.nz/