Is a bright-line test extension imminent?

Speculation is mounting that the government will extend the bright-line test beyond five years, capturing a greater number of investment properties for taxation.

While Prime Minister Jacinda Ardern has ruled out a traditional capital gains tax on investment properties during her time in charge, the Labour Government is exploring ways to take the heat out of the investment market following a record year. 

There's a growing belief that Finance Minister Grant Robertson will ask the Treasury about an extension to the bright-line test.

Robertson has confirmed he asked Treasury to review the effectiveness of the current model.

The bright-line test currently requires people who sell investment properties within five years of buying them to pay income tax on capital gains. The bright-line was introduced by National at two years, and extended by the coalition in 2018 to five years.

Tax advisers say the IRD is likely to up the ante in its enforcement of the bright-line tests. They also note there are provisions in existing legislation for greater taxation of any property sales made within ten years, under section 14B of the Income Tax Act. 

The scrutiny on the bright-line test comes after recent IRD figures showed a lack of compliance and enforcement.

Recent Inland Revenue figures found that a quarter of investors subject to the bright-line test did not pay the tax that applied. Of the 1,701 property sales it applied to in 2019, just 1,285 owners paid the necessary tax, according to the figures.

An extension of the bright-line test is supported by the Green Party and opposed by National, which has called it a capital gains tax by stealth. 

The debate points to greater scrutiny on landlords' activities as house prices continue to rise across the country.

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