Official documents show a protracted effort has been under way to simulate the conditions of a capital gains tax without actually imposing one.
A long paper trail of official documents shows a 'stealth' capital gains tax on property investments is being implemented.
The taxation of housing investment has long been regarded as a no go area by politicians and officials.
Yet a long series of official documents from ministers, MPs, the Treasury, Inland Revenue and the Ministry of Economic Development show a protracted effort has been under way to simulate the conditions of a capital gains tax without actually imposing one.
The main method is to push the capital/ revenue boundary' for property investors as far as it will go and also to put a greater burden of proof on the individual taxpayer to show a property purchase is not for investment purposes.
Tax officials have described the moves as a virtual capital gains tax, not to mention impractical.
But they have since been adopted, with additional resources thrown into IRD enforcement, particularity in Auckland, Queenstown and Wanaka.
The government-owned Housing New Zealand Corporation, which has taken over surplus government land to develop, has had to quietly set up a separate property development company, purely to avoid the IRD crackdown.
In that area, and in others, government officials have blown the gaff on the crackdown. Treasury advice on the Housing New Zealand property development company described the current regime as a 'capital gains tax '
'At the moment Housing New Zealand does not pay capital gains tax on any profit from the sale of its properties because it is categorized as a holder of residential properties for rental ... To ensure that property development activities do not taint Housing New Zealand's current expenditure from capital gains tax, Housing New Zealand has been advised to establish a subsidiary company to hold land containing parcels that will be on-sold. Only this company will attract capital gains tax,' the Treasury revealingly stated.
But the Treasury's advice is not the first official tip that a back door capital gains tax is being implemented, although the paper trail for this one is a little more tortuous.
The real gaff blowing event came in a response by tax officials early in 2003 to a set of proposals by United Future finance spokesman Gordon Copeland.
Mr Copeland wrote a long memo to Finance Minister Michael Cullen on the issue of savings, proposing a number of ways to persuade New Zealanders to save money in ways that do not involve buying real estate.
The Copeland memo addressed the area of intent. Under the Income Tax Act, if people who do not normally get an income from buying and selling property buy a property for investment purposes, they are expected to pay tax on the capital gain.
Among other ideas, the Copeland memo proposed the burden of proof be moved to the buyer, either through changing the Income Tax Act or by changing the way the existing law is applied.
Dr Cullen referred Mr Copeland's proposals to officials, who gave the idea the thumbs down.
In a lengthy paper, Treasury and IRD official dismissed the Copeland approach, saying it 'would amount to a de facto capital gains tax on rental property.
Yet that is what is now under way. IRD officials and accountants are now advising people buying property that if they do not want to be caught by the tax, they should make some sort of record at the time of purchase that shows the purchase is for reasons other than investment.
That can be difficult though - as the officials warned in response to the Copeland proposals.
'Assessing the intention of the taxpayer at the time of acquisition is very difficult because much of the evidence is subjective and a taxpayer may acquire an asset with a range of purposes in mind,' officials advised.
They also indicated the existing case law on the issue, although it takes the intentions of buyers into account, does not place the burden of proof on them.
The Copeland approach 'would override the current approach and case law. It would likely place a significant administrative burden on Inland Revenue as many taxpayers sought to prove their intent was not to resell. At present, having to prove this is an exception rather than the rule,' officials said.
But it's now less of an exception than it was. Factors the IRD is taking into account are how long someone has owned a property and what sort of finance they used to buy it. These, and whether the taxpayer has a history of buying and selling property, are taken as evidence for deciding whether the investor bought the property for investment purposes.
Technically the approach is not a capital gains tax but, as the officials pointed out, it certainly mimics the conditions of one. The issue is the “capital/revenue boundary” and where the boundary is drawn.
New Zealand’s tax system is based on the idea that taxpayers whether individuals, companies, trusts or other entities – are taxed on their earnings and not on the capital gain of their assets. That is, they are taxed on their revenue, not their capital.
What the IRD's approach does is to take assets previously classed as capital - that is, property - and, when they are sold, classify them as revenue, on the grounds that when the taxpayer bought them the intent was to make money from the sale of that property. And there is now much greater onus on taxpayers to prove they did not intend to make money when they bought a particular property.
Looking ahead, one of the difficulties is likely to be how far the IRD can go with this interpretation of the law: It would be a rare buyer of real estate who did not expect some capital gain from the purchase. A highly likely outcome is a legal challenge to the IRD's approach.
At that point, if not sooner, expect the issue to move into the political arena.
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