Treasury pushed hard for capital gains tax

9/07/2010

The Treasury lobbied hard for a capital gains tax on property investment and shares, based on the length of time they were owned, before the May Budget.

Papers released under the Official Information Act show officials backed a so-called "bright-line test" that would have slapped a capital gains tax on property and shares if they were sold before they had been held for five years.

The tax would have raised $220 million next year, mostly from share sales.

Officials said they preferred a comprehensive capital gains tax, but the "bright-line" test would be better than the current regime. It would replace the current "intention test" that requires proof a property was bought with the intention of sale before any gains can be taxed.

"In practice, this has been difficult to apply because it is difficult to prove intention, other than having the taxpayer admit it," the Treasury said in advice to Finance Minister Bill English.

Extending the test to cover shares would close the loophole that would otherwise be available if investors put their properties into a company.

The Treasury said the proposed tax should be "grandfathered" so that it applied only to investment properties bought after introduction of the tax.

A capital gains tax was not included in the Budget. However, changes to the tax rules for property investors were made, including removing the right to claim depreciation on buildings.

The papers showed a tax sub-group of ministers has expressed concern there might still be "over-investment in rental property", leaving the door open for further changes to property tax.

But a spokesman for English yesterday said there were "no plans at this stage for further changes to the tax treatment of investment property".

Some details of Budget tax changes were still being finalised and Inland Revenue (IRD) would soon start consulting on the treatment of fit-outs for depreciation purposes.

The papers show the IRD is interested in doing more work on a minimum tax on all rental property – say 1 per cent or 2 per cent of a property's total value. It is also keen to examine new rules to tax holiday homes to restrict deductions for costs, such as interest, rates and maintenance.

At the moment, owners who use their baches for four weeks and rent them out for only two weeks of the year can claim 48/52 of their costs because the bach is "available for rent" for 48 weeks.

"That might be viewed as excessive," the IRD said in a briefing note.

Reference: www.stuff.co.nz
By VERNON SMALL - The Press