Mark Keating: New property rules too little too late

About one-third of buyers in the Auckland property market are investors. Photo / Greg Bowker

Right on cue the Government has made a Budget announcement to tax property investors who sell property within two years. Investors who buy and sell land within that short period, regardless of whether they originally had that intention, will become fully taxed on any profit.

The rule responds to the strong hint delivered by the governor of the Reserve Bank last week that the Government must use the tax rules to open a second front in the war against Auckland house prices.

The Reserve Bank has announced its own plan to introduce higher borrowing ratios for investors buying property in Auckland. But these borrowing limits will not apply to home owners.

The Government's two-year tax rule is also targeted only at investors as it expressly exempts owners who "flip" their homes (buy, renovate and sell a home while they live in it, as they climb their way up the property ladder) in that time frame.

About one-third of buyers in the Auckland property market are investors. So neither the tighter lending rules nor the new tax rule will apply to home owners, who make up the remaining two-thirds.

From a tax policy perspective the rule appears so narrow as to be almost inconsequential.

Obtaining building or resource consent and then doing work to the property is likely to account for a significant portion of that period. Wise investors could delay any on-sale a few extra months to ensure they fall outside the two-year period.

The Government has been arm-twisted by its critics into a tax response to address Auckland property prices. But from the range of options available it has come up with the least effective.

The two-year time limit is too short. Existing rules for property developers and builders impose a 10-year limit within which all sales are taxed. Why was that same time limit not extended to all investors?

More significantly, why do the new rules automatically exempt home owners? Flipping their homes continues to be untaxed so the rule will not affect this behaviour.

Most tax experts agree that imposing a capital gains tax is the obvious solution - but this has been repeatedly rejected by the electorate.

A land tax (similar to rates, as it levies an annual charge based on the unimproved value of land) would have a more immediate impact on the property market - and also raise a substantial amount of revenue for the Government (something which neither the new rule nor a capital gains tax would achieve).

This option was recommended by the Tax Working Group of experts in 2011 but was rejected by the Government in favour of increasing GST.

A more effective alternative would be to extend the existing 10-year rules applying to developers and builders to all land, including home owners.

Instead of a blanket exemption for home owners, the existing exemptions applying to rezoned land could apply. These rules have been in force since 1973 but are seldom used. They were based on the presumption that if land owned by taxpayers is rezoned by the council in such a way as to increase its value, then taxpayers automatically enjoy a windfall not of their making.

The existing rules include an abatement of 10 per cent for each year of ownership, so that 100 per cent of the profit is taxed for land sold within a year, while only 50 per cent of that profit is taxed after five years, until after 10 years the gain is tax free.

This sliding scale achieves the desired result that speculation is taxed more heavily than long-term ownership. Perhaps it is time to extend these rules to all homes.

Perhaps more drastic tax solutions based on a combination of these options are warranted. But the new rule is just too little and too late.

Mark Keating is a senior lecturer in tax law at the University of Auckland Business School.