Shock awaits for tax avoiders

Non-compliance with the bright line test has been high but people shouldn’t take that to mean they can get away with not paying the tax involved.

Friday, March 9th 2018, 1:00PM

by Miriam Bell

Introduced by the previous government, the bright line test requires income tax to be paid on any gains from residential property sold within two years of acquisition, with some exceptions.

In a bid to dampen property speculation, the government recently introduced legislation into Parliament which aims to extend the bright line test from two years to five.

But a joint IRD-Treasury impact assessment on the government’s proposal has revealed that voluntary taxpayer compliance with the existing bright line rules appears to be less than 50%.

Further, the impact assessment says that non-compliance will continue to be an issue and is identified as an implementation risk if the bright line test is extended over a longer period.

Tax specialist Terry Baucher says the high level of non-compliance with the bright line test is no surprise.

Not only do the rules of the bright line test have many grey areas but, in the absence of a formal capital gains tax, most people will push the boundaries of intent, he says.

“People do try to get away with not paying the tax on properties bought and sold within two years.

“For most people, their default position will simply be that they didn’t plan to sell the property when they bought it so they don’t owe the tax.”

But, in Baucher’s view, people are unwise to underestimate the investigation capabilities of the IRD - which has a dedicated Property Compliance Programme.

“The IRD has extensive powers to investigate and to gather information on the activities of taxpayers when it comes to property,” he says.

“Additionally, there are some residential areas, like Botany and Flatbush in Auckland, where it keeps a close eye on all sales activity due to concern over the nature of that activity.”

In recent times, the IRD had been going through a major restructure which has involved significant cuts to its workforce.

Baucher says this will have impacted on their activities and may have led them to take their eye off the ball a bit in some areas.

“But when they get back on top of the game, that bright line test compliance rate is likely to increase and people who think they have got away with avoiding it are likely to be in for a nasty shock.”

In the impact assessment, it says that the IRD is following up on cases of apparent non-compliance with the bright line test rules.

It also says the IRD is considering changes to existing processes that could drive up voluntary compliance, although it doesn’t specify what they might be.

An IRD spokesperson says they go to significant lengths to help taxpayers meet their tax obligations.

“New Zealanders can be confident we will take every action against those who deliberately cheat the tax system.”

Don’t under estimate the IRD

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