Reported in the New Zealand Herald this morning, a house which has changed hands changed hands four times in three months, and made money every time.
We don’t know how much money was involved on the last transaction. But here’s the transaction history.
First sale: Mrs SW sells her home for $475,000. She bought it in 2012, for $291,500. The gain on sale is $184,500.
Second sale: Mr XZ sells the house for $522,500, two days after he bought it. The gain on sale is $47,500.
Third sale: A trust sells the house for $559,000, four days after buying it. The gain on sale is $36,500.
Fourth sale: The property is sold again, for an undisclosed amount.
So are any of these transactions subject to tax? As a general rule, capital gains are not taxable in New Zealand, except that if something is bought with the intention of resale, then any gains are taxable.
The first sale is clearly not subject to tax. Mrs SW bought the house and lived in it for three years. So in as much as we can judge her intentions from her actions, it seems very clear that she didn’t buy the house with the intention of resale, so it isn’t caught by our current tax rules. Even if we had a full capital gains tax in New Zealand, instead of our current half-pie measures, it’s highly likely that family homes would be excluded from the tax. This is a standard feature of capitals gains taxes worldwide: family homes don’t get caught, or if they are caught, then they also get some very big discounts. So Mrs SW gets a tax free capital gains. NB: before anyone thinks that’s unreasonable, remember that she still has to live somewhere, and chances are she’ll be buying another house. She may come out ahead, but she may not.
But what about the second sale? Mr XZ has said that he bought the house for his in-laws, but they changed their minds. They didn’t like the area anymore because it had too many state houses in it.
Perhaps that is the case. He would need to provide evidence of that, because on surface, his actions indicate that he bought the house with the intention of resale. That’s the usual inference to be drawn when something is bought and sold so quickly.
So on the face of it, I think that second transaction is taxable. If Mr XZ has no oother income at all (unlikely, but let’s run with that), then using the standard tax scales, he will pay 10.5% tax on the first $14,000 profit, and 17.5% tax on the second $33,500, or a total of $7,332.50.
The third transaction will come under much the same scrutiny. Buying something, then selling it four days later? Again that’s a very, very prompt sale, and it looks very much as though the property was bought with the intention of resale.
The tax rate for trusts is 33%. The effective rate can vary, depending on how much income is distributed from the trust and to whom, but we don’t know anything about what has happened within that trust. So I’m going to run with 33%, which makes the tax on the second transaction something like $12,045.
So I think there’s something like $20,000 or so of tax to be collected from these transactions. Possibly. Depending on whether or not IRD can prove intent, or the vendors can prove that they just happened to have to sell the properties. One thing is for sure: it will certainly be worth investigating, especially now that it has been splashed all over the NZ Herald.