nz shares or property

[dobby41]

In Canada there is no test. The rule is clear - 'primary' = one
There is no exemption of tax on the gains when selling a non-principal resident home either which means, there's not point of any bright-line holding period ; it's irrelevant.

If IRD wants to be greedy, they can do what the CRA does in Canada. If a portion of the principal resident home is rented out, then THAT % portion of the home will not have tax free capital gain. So if the basement works out to be 33% of the rented area of the entire house, then the owner of the house when it comes to selling (and if the place is still being rented), will have to pay CGT on that 1/3rd of the value of the home. The rental income from the suite is taxable income too. So there are many things that the NZ gov't can do to churn in more tax revenue. It all depends on the NZ politicians willingness to pay taxes on their property investments.

As far as IRD's concern, there is a key difference when you report your 'intent'. If I said we bought the house as an "investment" (and there is a tick mark box that describes what the purpose of buying the house was), then a brightline test would be less meaningful. Even after 5 years IRD can still come back to say you 'bought the house as an investment' and therefore, there is intent for profit, and therefore, taxes should be paid. People do not make 'investments', just like investing $ into a business, without the expectation of making a profit.

How about this distinction? The individual person buying shares is expecting a gain on their investment. Then why is it, the capital gains from buying NZ shares are tax free when buying foreign shares, are not tax free? IRD uses 2 kinds of measuring sticks for the same asset class but when it comes to investing in houses, it doesn't matter if they're NZ residential homes or foreign homes.

We don't have a CGT so what Canada with theirs is moot.
We have an 'intent' test which can turn your gain into income.
We also have a more specific form of the intent with the 'brightline'.

People do invest with the expectation of making a profit but that profit could be capital or income (the intent).
A person buying shares may be expecting a 'capital' gain - or they may be expecting dividend. Capital gain isn't taxed if you are expecting dividend (which is taxed as income).
The FIF rules came in because overseas dividends are so low (mostly) that you must be expecting a capital gain - so they made a rule as such.
With property, it could be said that for many properties the expectation of making a rent profit is so low that the only rational explanation for buying the 'rental' was for capital gain and therefore that must be your real intent - and tax them.

[artemis]

... With property, it could be said that for many properties the expectation of making a rent profit is so low that the only rational explanation for buying the 'rental' was for capital gain and therefore that must be your real intent - and tax them.

It could be said and plenty do say. But do they take into account the fourth dimension, plus changes of rules, laws and compliance since purchase.

More than 60% of rental property owners declared a profit in tax year 2018. The only rational explanation is that the intention was income not capital gain. Right?

With ring fencing of rental losses now in place, it is likely that more landlords will reduce rental losses by increasing rents and keeping maintenance to essentials. As otherwise they are dipping in to their own tax paid pocket to the tune of over $8000 average (tax year 2018 again). And of course the faster they get to break even point the faster they can use up their carried forward losses and consider exiting the sector.

I am sure those consequences were completely expected by the government.

[Bjauck]

...
The FIF rules came in because overseas dividends are so low (mostly) that you must be expecting a capital gain - so they made a rule as such.
With property, it could be said that for many properties the expectation of making a rent profit is so low that the only rational explanation for buying the 'rental' was for capital gain and therefore that must be your real intent - and tax them.

Actually I think the NZ dividend yield was the outlier being quite high. That is probably for a variety of reasons including a high payout ratio of profit. This helps result in underinvestment in business, lack of productivity growth and many NZ businesses ending up being foreign owned (Last company please turn off the lights at the NZX?)

With interest rates on term deposits less than 1%, the net rent yield on investor housing is not looking so puny!

[Norwest]

Last year we bought the house 4 doors down from our principal residence. With the conveyance person filling out the forms, she queried us on 'intent' if we were really buying that house as a 'personal dwelling' knowing she had previously changed title of our house to our names. I thought this was quite interesting but she accepted our reason for purchasing that house last year. The full intention for buying was to provide a home for wifey's parents. Their financial situation did not permit them to buy the house outright in their name so we wanted it on our name. She accepted but informed us that IRD can check on that ; apparently they must of accepted.

I find it interesting as in Canada, there is only ONE house that is a 'principal residence' ; you can not have 2 places with that designation on the tax filing. So if IRD is really cracking down on people selling homes, at best, they're only after those that buy into as a business, renovating, flipping, etc. Clearly in our case we collect no rent, the inlaws use the place as their own and maintain it as their own. Their mail goes to there. etc. Should we feel guilty because such a move could never be done abroad?

and after all, bright-line tests really don't mean much in the realm of retirement planning. Everyone buys a house and treating it as a long term investment (no different to Kiwi Saver), is not going to sell within 5 years.

With what you have written I guarantee you that the IRD did not accept this property being your PPOR or "personal dwelling", your declaration is irrelevant and if you sell this property within 5 years the brightline test will apply to the sale of this property.

"Did you live there for at least 50% of the time that you owned the property?" - this simple question determines if you need to fill in an IR833 form or not.

If you don't believe me - check with your chartered accountant.

[SBQ]

With what you have written I guarantee you that the IRD did not accept this property being your PPOR or "personal dwelling", your declaration is irrelevant and if you sell this property within 5 years the brightline test will apply to the sale of this property.

"Did you live there for at least 50% of the time that you owned the property?" - this simple question determines if you need to fill in an IR833 form or not.

If you don't believe me - check with your chartered accountant.

The person that did both of our houses insisted yes, IRD can contest having both places as listed personal residence. However, my argument is this (as I tried to explain before). How is it in NZ there is a silly 'Bright Line Test' of 5 years which entirely proves ineffective to taxing any of the capital gains when the houses can be sold every 5 or 10 years? It again as I explained before, goes back to the "intent" of buying the houses (as 'investment'?). From my Cdn experience and understanding, the definition of an investment (which the Cdn Income Tax Act does define); derives income and or gains ; and therefore is subjected to taxation. When I see the word "Investment" on the IRD declaration form as one of the reasons for buying the house, again, that tells me IRD can some day in the future tweak the rules and subject 'investment' in residential properties as taxable income. You have to questioned the whole framework when you fill out these declaration forms and what possible future changes could occur.

Therefore the accountant doesn't care if you've held the house for longer than 5 years unless you've indicated 'intent' that the house was acquired purely for financial gain.

[Bjauck]

Wow, so should we steer clear of all houses?

Stuff have not lost their skill for click baiting as many readers as possible. When you click through to the actual article, the story changes somewhat!

Maybe they should package climate change as another "mea culpa" theme along with their pieces on Their contribution to racism in NZ.

After all, the adverts in their publications, which are fed by their click-baiting screaming headlines have helped foster a culture of planet-affecting mass consumerism.

https://www.stuff.co.nz/environment/...-years--report

[SBQ]

@dobby41:

The question lies in what the borrowed funds will be used for. I know 1st hand of a friend (on pension) that has been mortgage free for some time but the bank would not lend him a mortgage on a larger place, despite having the equity of a fully paid home. Their reason was clear; 1) no reliable source of income & 2) his age. While banks aren't really allowed to discriminate by age, the prior is the key reason for rejection of mortgages.

Take the case for house & land package builds where the banks make payment under 'progress payments' to the builder. Changes to the housing plans / variations are red flags as they need 100% clarity what the extra funds (or where the funds go?) will be allocated to in the building process. In this scenario, no bank is going to give 100% of the funds and let the person project manage & choose how they spend it without formal disclosure and contracts.

On a slightly different issue, i'm not at all impressed that almost all the banks in NZ (except Kiwi Bank) are foreign owned. That is, the profits they make are to the benefit of the shareholders abroad. I'm not saying there should be laws to discourage foreign ownership but I do think NZ is way behind in terms of shifting from non-productive 'real estate assets' to investing in more liquid assets like shares in business all over the world. However, our tax laws discriminate dearly with preferential (or lack of tax) on real estate vs more productive assets like equities.

[dobby41]

@dobby41:

The question lies in what the borrowed funds will be used for. I know 1st hand of a friend (on pension) that has been mortgage free for some time but the bank would not lend him a mortgage on a larger place, despite having the equity of a fully paid home. Their reason was clear; 1) no reliable source of income & 2) his age. While banks aren't really allowed to discriminate by age, the prior is the key reason for rejection of mortgages.

So the mortgage wasn't rejected because of what they wanted to USE the money for but rather their ability to pay it back.
So you have proven my point!

[dobby41]

On a slightly different issue, i'm not at all impressed that almost all the banks in NZ (except Kiwi Bank) are foreign owned. That is, the profits they make are to the benefit of the shareholders abroad. I'm not saying there should be laws to discourage foreign ownership but I do think NZ is way behind in terms of shifting from non-productive 'real estate assets' to investing in more liquid assets like shares in business all over the world. However, our tax laws discriminate dearly with preferential (or lack of tax) on real estate vs more productive assets like equities.

Maybe you can clarify something for me - how are equities productive?
Buying initial shares in a new venture is productive but after that the company doesn't get a cut from the trading so how do they add to the company?
Sure, if they make another equity raise it helps to have a high share price but that doesn't happen a lot.

A rental property could be considered productive - they produce a lot of ongoing economic activity from property management to repairs and maintenance.

[SBQ]

Maybe you can clarify something for me - how are equities productive?
Buying initial shares in a new venture is productive but after that the company doesn't get a cut from the trading so how do they add to the company?
Sure, if they make another equity raise it helps to have a high share price but that doesn't happen a lot.

A rental property could be considered productive - they produce a lot of ongoing economic activity from property management to repairs and maintenance.

There's a lot of inconveniences owning a rental property ; the maintenance and rates, insurance, expense that eats the return on the rental income. Where does this leave in terms of overall productivity? Not a lot compared to ownership of a business that allocates the wealth in all different areas. Specifically if one that can be exported (no you can't export the land and house it sits on in NZ abroad). So from an economic potential, there's no way a house can out beat the productivity potential of tangible & intangible products that can have a global market exposure.

But don't take my word for it. Have a read below that puts NZ's productivity at the near bottom:

Or, and the economic issue that mostly drove the creation of this blog, New Zealand’s dismal long-term economic performance. In short, productivity growth (and the lack of it), and our continued decline relative to other advanced economies...

Sadly, the only realistic interpretation one can take is that the IMF thinks that over 2019 to 2025, on current government policies, New Zealand’s productivity growth performance – labour productivity and MFP – will be simply shocking. Most probably negative – the only way to square falls in real GDP per capita, unemployment returning towards normal, and a reasonable level of investment – and almost certainly far worse than in almost all other advanced economies, and especially far worse than the performance in the countries that were aiming to close gaps with the OECD leaders.

https://croakingcassandra.com/category/productivity/

Perhaps NZ's huge preference in owning real estate assets is part of the reasons of NZ's low productivity? I would believe so.