New Zealand raising bar to foreign property owners, with tax on gains

New Zealand lawmakers are introducing a disincentive to foreigners seeking to buy New Zealand residential property as an investment, by raising the threshold at which tax will not need to be paid by such investors on any capital gains to five years or longer, from two years.

The new tax charge was introduced last week in the form of a late amendment, or “Supplementary Order Paper”, to the country’s finance bill, which is expected to receive royal assent, and thus come into force, next month.

The new rule will apply only to residential properties bought after the bill receives royal assent.

Current exemptions to the tax would remain, including an exemption if the residential property in question happens to be the property owner’s main residence.

The tax charge is aimed at investors, especially foreigners, who buy New Zealand residential properties as investments rather than to live in.

Non-resident foreign buyers of New Zealand residential properties already have to comply with a number of requirements, including the setting up of a New Zealand bank account, if they don’t already have one, and getting a New Zealand tax identification number to register their purchases, as well as supplying their tax ID number in their home country to the New Zealand authorities.

In a statement announcing the tax change, New Zealand revenue minister Stuart Nash said the increase in what he called the “government’s bright-line test” to five years would  “ensure that residential property speculators pay income tax on their gains and makes property speculation less attractive”.

“We need investment which grows the economy and creates jobs, not the sort of investment which distorts the residential housing market,” he added.

“This measure will bring fairness back into the tax system.”

Plan to ban foreigners
from buying existing homes

Another measure under consideration recently in New Zealand has been a proposal to ban overseas buyers from purchasing existing homes at all in the country. The proposed legislation, known as the Overseas Investment Amendment Bill, was introduced in December, and is intended to address New Zealand’s unusually high homelessness problem by ensuring that only citizens and permanent residents of New Zealand and Australia will have an automatic right to buy existing homes in the country. Non-residents would be able to apply for permission to do so from the Overseas Investment Office or buy newly-built properties.

‘New Zealand tax treatment not unfavourable’

Some New Zealand experts argue that the press coverage of the planned raising of the threshold at which expat investors need not pay CGT on their NZ residential property investments, and the proposal to ban overseas buyers from buying existing homes at all in New Zealand, is creating an unfair impression of the country’s overall desirability as a place for non-residents to own property.

Among them is Patrick Wilson, a director of Aukland-based private investment, merchant banking and immigration consultancy Consul Group, who said that care should be taken to avoid leaving outsiders “with the impression that New Zealand’s tax treatment for overseas investors is unfavourable”.

“Apart from certain tax havens, there would be few countries with such an accommodating tax system as New Zealand’s,” he added.

Over-heated residential housing markets 

New Zealand is nevertheless among a number of countries that have moved to cool their over-heated residential housing markets after foreign buyers have sent prices soaring – and voters to their elected representatives in these jurisdictions for relief.

A number of Australian states, for example, have introduced taxes on residential property purchases by foreign buyers and temporary residents, including Queensland, which has a 3% tax; Western Australia, 4%; Victoria, 7%, New South Wales, 8%, and South Australia, 4%.

The country has also announced that foreign owners of Australian properties, including Australian expats, will no longer be exempt from having to pay capital gains tax on the sale of their main residence (the so-called Main Residence Exemption), as detailed here last year by Atlas Wealth Management’s Brett Evans.

This fact of the scrapping of the CGT exemption as it applies to expats was also the subject of a story published today on the website of The Sydney Morning Herald,  headlined “Aussie expats becoming potential collateral tax damage”.

A number of Canadian markets and provinces have also introduced taxes on the purchase of residential property by foreign buyers, including Vancouver and the greater Toronto area.

Other markets that have sought to find ways to cool the enthusiasm of foreigners for their residential properties include Hong Kong, Singapore, New York and London, as residential property in desirable areas is increasingly seen as a must-have “asset class”.

One of New Zealand’s appeal to wealthy would-be purchasers of its residential property, meanwhile, according to recent press reports, is its remoteness, and general appeal therefore as a place to ride out any future apocalypse.

Its reputation as a place to escape from whatever civilisation-threatening events might one day transpire may have been enhanced recently after it was revealed that Peter Thiel, described in a recent Daily Mail article on the subject of his New Zealand property purchase as the “billionaire PayPal founder, Facebook director and frequent adviser to President Donald Trump”, is building a “panic room” in a four-bedroom property on New Zealand’s South Island that he acquired for US$4.8m in 2011.

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is Chief Correspondent for International Investment. She is a US-trained journalist who has worked in Rome, New York City and London, covering among other things the fashion and retailing industries, the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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