Taxation (Bright-line Test for Residential Land) Bill

To just put on record, it is the Labour Party’s position that we support measures to cut property speculation. However, we would argue that this piece of legislation is not only weak but it has been done in haste. It will not achieve the objectives it sets out to. In fact, I suspect and I predict that we will be back here before the end of the parliamentary term, amending legislation.

I want to use an example, in terms of the lack of coherence and the problems associated with this bill, and turn directly to clause 15(9): the part of the definitions that deals with the “main home”. I want to quote from an article of 9 November 2015 from one Terry Baucher, who is an accounting expert, who said: “We do not believe that the introduction of a bright-line test for residential land is sound tax policy.” Now, that was not a quote from Mr Baucher; that was from the Chartered Accountants Australia and New Zealand—that is CANZ—and was the opening sentence to its submission to the Finance and Expenditure Committee on this bill. If you look at clause 15(9) as an example of a lack of coherence and one definition, I think, that one could shoot peas through, it talks about the “main home” meaning for a person: “the 1 dwelling—(a) that is mainly used as a residence by the person (a ‘home’); and (b) with which the person has the greatest connection, if they have more than 1 home.”

I would like to start by asking the Minister in the chair, the Hon Michael Woodhouse, and through him his officials, how on earth officials are going to be able to police that “the greatest connection”. Is there going to be some sort of levitation, or is the Inland Revenue Department going to sort of find its softer side and start judging people’s feelings and how they define their connection with their main home? The Minister has said in his statement about this bill that “the bill will ensure that people pay their fair share of tax”, and “by supplementing the current intention test in the Income Tax Act it will make rules simpler for taxpayers to understand, and easier for the IRD to enforce”.

Yet, if you look at the counterargument put forward in the officials’ report to the Finance and Expenditure Committee, in the submissions of both the Chartered Accountants of Australia and New Zealand and Ernst and Young, they say: “The Government could achieve its policy objective by supplementing the ‘intention test’ more simply and coherently by amending section CB 6.” They go on to say that the “differences between the brightline test and the current land sales rules are likely to increase uncertainty and cause confusion”. So, on the one hand, you have got the Minister who says that this piece of legislation will be nirvana, will create a simpler regime for taxpayers, and will ensure that there is certainty. Then you have the experts—and I know Mr Bennett, who chaired the committee, is, I think, actually a chartered accountant or from the profession. So I am going to be really interested in the contribution of that learned member, who, I am sure, knows far more about this legislation than anybody else in the House, and whether he joins with Ernst and Young and the Chartered Accountants Australia and New Zealand, who say this will cause increased uncertainty and cause confusion.

The basic principle of tax policy, as I understand it, is that it has to be simple, it has to be clear and transparent, and, generally speaking, not retrospective—as parts of this legislation are. I would be grateful if the Minister could tell us how the Inland Revenue Department is going to judge a person’s “main home” in terms of clause 15(9) and the person’s “greatest connection”. What are the criteria for that? How is that going to be defined so that people have certainty and so that this legislation will not create confusion, and will stand up to the basic rudimentary analysis that one would expect, perhaps, from a court of law?

There are other exemptions dealt with in this legislation—for instance, farmland. I would like the Minister to take us through the definition of “farmland”, in terms of the definition of exemptions around farmland. For instance, what is the situation where a farm has a number of houses situated on it—perhaps for the farm manager per se. How is that going to be dealt with in respect of this legislation?

I would also like the Minister to outline for us why it was that the Government did not take Treasury advice and put in a brightline test of 2 years rather than the brightline test that was suggested, that being 5 years. A number of submitters have said that the unintended consequence of this 2-year brightline test—well, maybe it is the intended consequence from the Government—is that those that the Government purports, allegedly, to be going after, and that is the speculative community, will change their behaviour and will simply hold for 2 years and move after that.

Whereas one of the consequences—and where this will actually whack people—is if there is a death in the family, an unintended consequence of somebody losing their job, hardship per se, which is not dealt with in any way, shape, or form in this legislation, that person may well be forced to sell their home inside the 2 years because of the change in their personal circumstances around hardship; where you will get, I suspect, inequity. A number in the accounting profession—remember, the Law Society also opposed this, not only the chartered accountants—raised this issue. Nowhere in this bill is it dealt with. So I would like to ask the Minister what happens to Mr and Mrs Bloggs if there is unintended hardship. Say they do lose their job, somebody has cancer, there is a death in the family—name a number of scenarios that you like—and they are forced to liquidate in order to survive. Where is that dealt with in this legislation? Because it is not.

And why was it that the Government refused the Treasury advice to make the brightline test 5 years? I suspect we know the answer, and the answer is that this is really a fictitious piece of legislation. It is designed, as many actions of the Government are, to make it look like it is doing something about property speculation in Auckland, because after years of this side of the House putting its feet to the fire, and public opinion growing and growing and growing, the Government has woken up, read its polls and said: “Hey, we’d better be seen to be doing something.”—seen to be doing something. And so, it has said: “Look, we’ll bang out a 2-year hold.” Let us get real about it. If you are making 17 to 20 points per annum, as many people are in Auckland, in terms of capital gain, well, you are going to hold for 2 years. Why would you not? Where are you going to get a better return than an Auckland property anywhere in the economy?

But if you are Mr and Mrs Bloggs who fall on hard times and something happens in your financial arrangements, and you are forced to sell within that 2-year period, you get whacked, whereas many submitters in eminent accounting firms and others pointed out that the inequity will be a change in behaviour by the speculative community, which will simply hold on for 2 years and then do what it has always done. And, as noted in the submissions that I read out by Chartered Accountants Australia and New Zealand and Ernst and Young, if the Government was really serious about tackling this issue, it would deal with and strengthen the intention test—which is as loose as, today; in fact, the Inland Revenue Department has lost court cases around it—and it would actually deal with that. But that intention test, which could be defeated by simply saying: “What was your intention in buying the property?”. “Well, my intention was to move to Auckland, but then my partner changed their mind and said they didn’t want to move to Auckland, so we sold.” That, in law, is very, very difficult to defeat—extremely difficult.

So why is it—and what is the meaning of “greatest connection” in terms of the “main home”? That would be a really interesting one to do. Maybe the Inland Revenue Department is going to, as I say, get the softer side going, do a bit of levitation, and work out what people’s feelings are towards one of the residences that they deem to be their main home. How is that actually going to work in practice? Because you could shoot peas through that definition. So those are some of the questions, as we go through this shambolic piece of legislation—

I rise to speak on the Taxation (Bright-line Test for Residential Land) Bill. The Green Party is supporting this bill, but we do have great misgivings, as the legislation could be substantially better and have a greater impact in terms of reducing the problem of unaffordability in the Auckland housing market. To that, I will be putting forward two amendments today to try to improve this legislation, and I would like to speak to those Supplementary Order Papers more in detail, but I will start just by stating why it is important—why this bill is important and why dealing with the Auckland housing crisis is important.

It is important because every New Zealander has a right to live in a warm, safe, secure, affordable home. Every child in New Zealand should have a warm, dry, secure, affordable place to call home, and that is increasingly out of reach for a number of low-income Aucklanders, and people elsewhere in the country. We have had problems with unaffordability in Christchurch. So, for the Green Party, we know that we cannot build a prosperous society if people do not have a place to call home, and it is of utmost importance that we prioritise that as a society.

But there is a second reason why it is important, and that is the financial stability, economic stability, and health of the country. The fact is that the Auckland house price crisis is a major risk to the financial stability of the country, and that is why the Reserve Bank, in particular, and many others, have been very, very concerned about Auckland house prices. If we have a bubble and it collapses, there will be consequences for the New Zealand economy. It is quite possible that it would be enough to send us into recession, even if our banks are solvent. There would be enormous economic repercussions, and, of course, the faster house prices increase, the harder they fall when the bubble finally does pop.

And, of course, we know that many people have been asking the Government to act on this issue for a number of years. The Green Party has been calling for a levelling of the playing field of property with other investments and other income through a capital gains tax since at least 2002, if not before that.

We know that in 2010 Treasury pushed very hard for a comprehensive capital gains tax, and that was its preference. A capital gains tax would still be our preference as a fair way to deal with it. If one earned income because one bought a house that then increased in value over a period of time—if that is an additional 100 grand or 200 grand, as may be the case in Auckland—why should one not pay tax on that income, just like nurses and doctors and builders and teachers pay tax on their income? It is only fair.

But back in 2010, when Treasury pushed this National Government hard to implement a capital gains tax, it also proposed a halfway house, or a kind of compromise measure, which was the brightline test. At that point, the brightline test was designed as being 5 years, which is the minimum amount of holding period for the vast majority of OECD countries that have similar laws. Unfortunately, the legislation we have before us today is not 5 years—it is 2 years—and I will be putting forward an amendment to extend it to 5 years because, as we heard from submitters, a longer period would be much more effective at achieving the stated objectives of the bill, and it is the norm in OECD countries.

Of course, if National had actually acted on Treasury’s advice back in 2010, we might not have the problem that we do today to quite the same extent. The average house price in Auckland in October 2010 was about $530,000; now the average house price is $918,000, as of October 2015. So during that 5-year period, when there was total inaction from this Government, we had an increase of nearly 75 percent in the average house price in Auckland. That is an almost $400,000 increase for each house, and, of course, if that change in value is realised by people who are buying and selling properties during that period, all the money they earned on that will, of course, be completely tax-free.

And so why would people not invest in the housing market in Auckland? The Government is sending the signal through the tax treatment on property that that is where they should put their money, even though it means that it is harder for families to afford homes in Auckland and it is a risk to the financial stability of the country. So I understand why people who have invested in homes may not want to pay tax on their income, because currently they have got quite a sweet deal, but it is not what is in the interests of the country as a whole—to not deal with this problem.

So to the legislation before us today. I was very disappointed, and I think it is safe to say that virtually every submitter who came to talk to us was disappointed in the legislation as it was drafted. We simply did not have enough time. Even though the Government has known about the problem and has been advised by Treasury to act on it for over 5 years, the legislation, when it finally came before the Finance and Expenditure Committee, had a curtailed process.

We had a shortened period for hearing from submitters. We had a number of questions that we put to officials that they really did not have adequate time to address. Therefore, the legislation, I think, is really lacking, and is not the best it could be. We heard from a number of submitters that it is incredibly important that legislation, particularly tax legislation, be coherent and consistent, and this bill does not meet that test.

One way in which it does not meet that test is that, supposedly, the bill is meant to buttress the intentions test. The intentions test has a 10-year period and applies to all land, but this bill before us today, the Taxation (Bright-line Test for Residential Land) Bill, applies only to residential land. This is problematic in several respects, and a number of submitters stated this during the hearings of the select committee. Firstly, it is difficult to define residential land. This is going to be very problematic, and I am not sure that those on the select committee, particularly Government members and officials, really understand just how difficult it is going to be to define land.

Within the bill it refers to the zoning of the land as a test as to whether or not it can be residential. The truth is that under the Resource Management Act pretty much any type of land, whether it is zoned industrial, commercial, or mixed use, could be used for residential purposes if the applicant applies and gets a resource consent. So because of the way our resource management law works, it assumes that you can pretty much do whatever you want if you have got enough money and enough lawyers to apply for the resource consent and get it from the council, which is a pretty high bar, admittedly.

I think it is going to prove very problematic, because there is a huge amount of land that is being land banked by speculators on the anticipation that eventually it will be available for residential use, but it is currently not used for residential purposes—it is currently farmland or industrial land on the outskirts of Auckland. So I think we are going to have a problem with the definitions. My proposal to solve that problem with the definitions is simply to stop having the distinction. Why would we want to have a distinction about residential land? It does not matter what the land is used for. It is simply clearer if it applies to all land. If there is not a problem with speculation in commercial land, industrial land, or farmland, then it is not going to be a problem.

The intentions test applies to all land; certainly, this legislation should apply to all land. It removes a potential loophole by which suddenly other types of land may become a problem. Because we have got the law applying only to residential land, there may be sudden demand for property speculation in any type of land that is not residential and that is within the vicinity of Auckland and that is used for other purposes.

So I think that it would simply make it a much clearer piece of legislation, it would help better address the purpose of the bill, and it would not create any loopholes. Certainly, I think we heard from most submitters that they agreed that it would make more sense, if the bill was going to pass, that it apply to all land equally, not just residential land, and then we no longer have this problem with the definitions. I really do think it is going to prove very, very difficult to isolate what is residential land and what is not, because, theoretically, land use can change—it does change, all the time, and particularly in fast-growing urban areas like Auckland.

So my Supplementary Order Paper today, which I would ask members of the Committee to consider voting for to improve the bill, is Supplementary Order Paper 139. What that does is it removes the references to residential land so that the bill applies to all land. The other Supplementary Order Paper I will be putting forward is Supplementary Order Paper 138, and that is to extend the time frame from 2 years to 5 years.

One of the criticisms we heard from submitters during—

The Government has introduced a half-hearted and ineffective measure that will not achieve any of the goals that it says that it is setting out to achieve. It will not stop speculation. Treasury itself made that very clear in its report to the Finance and Expenditure Committee. What it will do is mean that the speculator will sell 2 years and 1 day after they have purchased the property. It will not achieve the goal of cutting out the rampant speculation that plays a role in forcing up house prices in Auckland at the present time in a totally unprecedented manner.

House prices have gone up $180,000 in the last year in Auckland—$180,000, which is more than $3,000 a week. Is this a bill that shows the Government is on the side of the family home buyer? No. This is a bill that shows that, despite what the focus groups say it should be doing, this is a Government that is on the side of the property speculators, who fund so many of the National Party’s election campaigns.

Will this bill stop the exorbitant inflation in house prices? The answer from everybody making submissions to the select committee was that it will not do that. It will not reverse the situation where we have the lowest homeownership rate in the country in 64 years and where 57 percent of Auckland adults are renting because they cannot afford to buy their own home—57 percent of Aucklanders are renting.

💬 Alastair Scott: What’s the problem with renting?

I will tell you what is wrong with that. Most New Zealand families have the dream—the Kiwi dream—of being able to have a home they can call their own. That is what most Aucklanders still want. This bill will not achieve that outcome.

What this bill does do is make one half-hearted admission—and it is in the regulatory impact statement—that I have not heard in 6 years from this Government. It says: “The Government is concerned with high house prices, particularly in the Auckland area. Property speculation is seen as one of a number of causes of the current prices.” I thought it was the Resource Management Act—that is all Nick Smith ever talks about.

💬 Phil Twyford: Or the council.

I thought it was the council’s fault.

Finally, the one worthwhile thing in this bill, and why we will probably support it, reluctantly, because it is better than nothing but only just—only just—is an acknowledgment that property speculation is playing a role in forcing up house prices, causing a housing bubble, and stopping New Zealanders achieving what everybody in this Committee has as part of their Kiwi dream, which is owning a home of their own. But it will not work.

The regulatory impact statement says why Part 1 of this bill will not work, because the regulatory impact statement identifies what the actual problem is with the Income Tax Act. This is a quote from the advisers to the Government. Why did it not listen? The regulatory impact statement says the intention test—that is the test at the moment. You pay tax, if you are speculating, only if you intend to sell the property afterwards. And do you know what the regulatory impact statement says? It says it “makes gains from the sale of land taxable when bought with an intention of resale. This ‘intention test’ is difficult to enforce due to its subjectivity.” It says the test “is particularly difficult to enforce in relation to residential property”.

We have an Income Tax Act that is not working. We have people speculating on property and not paying their tax. That is hundreds of millions of dollars in tax avoidance. But what will this bill achieve in terms of cutting off that tax avoidance? Do you know what it says it will achieve?

💬 Hon David Cunliffe: $5 million.

$5 million a year. You know, that is probably the capital gain on one house in Kohimārama. It is ludicrous. That admission in this regulatory impact statement shows the nonsense of the Government’s claim that this bill is going to achieve anything at all. This bill will not achieve that.

The other problem with this bill is that it did not follow—and we are talking in Part 1 about the Income Tax Act. There is a particular procedure that is always followed when there is an amendment to the Income Tax Act. Income tax law is incredibly complex and it is prone to having unintended consequences. What normally happens is there is a discussion paper. It goes out to the experts, they chew through it, they come back with recommendations for change, and then it comes into the House. Then there is a period of 7 or 8 weeks, at least, for people to make considered submissions on the process. Did any of that happen with this bill? The answer is absolutely not. It was introduced as part of the Budget for political reasons, because National’s polling and its focus groups showed that the public is disgusted that this National Government is not doing anything about property speculation—about people making money without paying their fair share of income tax.

Why is it that the cleaners who clean our offices tonight, on their low minimum wages—barely enough to scrape together a subsistence income—will pay tax on every dollar that they earn, and the people who are making hundreds of thousands of dollars a year on each property they speculate on will pay no tax at all? Why is it that that is fair? Why is it that that is just? Will this bill do anything about it in Part 1? The answer is no.

Do you know how long people were given to make submissions on this bill? It was about 10 days—10 days for a complex piece of legislation. When the people who know something about tax law went to the select committee—the chartered accountants, for example; the Law Society; KPMG—every one of them said that this legislation would not work and that this legislation would not achieve its objectives. They said that if the Government was going to catch anybody with this legislation, it was the person who sold for genuine reasons, not the speculator, because the speculator can hold on for 2 years and 1 day, and the person who has to sell because of financial difficulties cannot do that. Those submitters damned this legislation. They said that it was incomprehensible. They said that you needed better enforcement of the existing rule, not this piece of legislation. This legislation is political trash, according to those submitters. It does not do what the Government claims needs to be done. It will not achieve its purposes.

The chartered accountants said that speculators will not change their behaviour to hold a property just longer than 2 years, and that is why I support what Julie Anne Genter has put before the Committee, and I support what Treasury said we should be doing, which is 5 years. With 5 years you might deal with some of the speculators; if it is 2 years, they will hold on. They will hold on and they will make a lot of money in a short period of time, and they will pay no tax on it.

This bill will not help people achieve homeownership. This bill will not stop rampant house price inflation. This bill will not require people to pay the tax that they ought to pay on income that they are earning and the sort of tax that every other decent, hard-working New Zealander has to pay. This bill is not much better than a speculators’ charter, and Government members should hang their heads in shame that they bring something so inadequate into the House when in my city—

💬 David Bennett: Your city—what city?

—yes, the city I live in and I am proud of; that city—57 percent of Aucklanders cannot buy a home of their own. More than half of the adults living in Auckland cannot achieve the Kiwi dream of homeownership, and what does the Government do in response to that? It says “There’s a political problem out there. Let’s flossy something up so that it looks like we’re doing something.”, but it has come back with a piece of legislation that actually achieves very little.

If it were not for the symbolism of the fact that speculators ought to be taxed—that we stop people making a fortune from doing nothing, at the expense of the family who buys the property and who will work another 10 years to pay off their mortgage—we would not support this bill. It is an acknowledgment that speculation is a problem and it is an acknowledgment that the law is not working, but it fails to solve the problem. It is political floss; it is not real political action.

That was a very arrogant speech from a member who thinks that he would own a city and that it is his city, which is not the case. That member, Phil Goff, has no idea about the Taxation (Bright-line Test for Residential Land) Bill. He was not even on the Finance and Expenditure Committee. He comes into this Chamber and tries a barrage of attacks, and yells at this institution to try to explain his point of view. Well, let us look at the word that that member used continually through his speech. That was the word “speculator”.

Well, I have got news for that member: a speculator would pay tax, because under New Zealand law and the 10-year rule, anybody engaged in the business of buying and selling a property with the intention of resale would be a speculator and they would pay tax. That is a 10-year rule. Those members over on that side say: “No, no, no, no. If we had a 5-year rule instead of a 2-year rule, it would be OK.” Well, what about 5 years and 1 day? That would have exactly the same problem, but that person would be caught because they are under the 10-year rule, because they are a speculator in property. Mr Goff, if you intend to stand for the mayoralty of Auckland City, please understand what property law is about. Please understand the tax law of New Zealand, and do not come to this Chamber and mislead the public of New Zealand in a way that shows and demonstrates your lack of knowledge of these issues and your inability to put them across in this Chamber.

💬 Hon Clayton Cosgrove: Point of order.

The CHAIRPERSON (Lindsay Tisch): No, I am going to deal with something first. The member cannot say that a member has misled the House. The member will withdraw that comment and apologise for it. You cannot say that someone has misled the House.

I withdraw and apologise. Going back to the speech from that member, the 10-year rule applies to speculators, and they are taxable. All this legislation does is deem that within 2 years of that sale, it would be automatically considered to be taxable in that way. Just as those members over there want a 5-year automatic requirement, this is a 2-year automatic requirement. The 10-year test still applies in both cases, and I suggest that that member understands tax law before he comes to this Chamber again.

Thank you.

💬 Stuart Nash: Stuart Nash?

Mr Chairman did not say “Stuart Nash”, actually. As colleagues have pointed out in the last few contributions, this bill demonstrates what has become a classic pattern with this Government. We see it particularly in relation to the housing crisis, where for several years the Government has denied, denied, denied that property speculation is even part of the problem in the Auckland housing crisis. It has denied it in this House. It has denied it in the media. What we see—and it is a hallmark of this Government—is that it waits and waits and waits, denies, denies, denies, and then, when the focus groups and the polling tells it that it cannot credibly maintain that position any longer, it just does the bare minimum.

This bill is yet another bit of legislation that the National Government has brought to this House that does just the bare minimum. We are in this incredibly frustrating position of actually voting for it because it is, at least, an acknowledgment that speculators are part of the problem in Auckland. It is, at least, something, but it is not much. So we support it, but we want to make it absolutely clear to this Committee that it is a completely inadequate response.

In the course of this debate we will go through this legislation clause by clause, with reference to some of the very trenchant criticism that credible, expert submitters made to the Finance and Expenditure Committee about just how pathetic this bill is. The first is that, and we can see this in the advice from Treasury, this bill is expected to net $5 million—$5 million. There are billions of dollars of tax-free capital gain happening as we speak and every year in the Auckland property market. There are billions of dollars of tax-free capital gain going on right now in the Auckland property market, but this Government does not care about that. It does not care about the loss to the economy. It does not care about the social consequences of an entire generation of young New Zealanders locked out of the housing market.

This Government does not care about that, because John Key has made a political calculation. He has been very candid about it. He has made the calculation that he has more votes to gain by pandering to property owners who are watching their net worth go up by about a thousand dollars a day, at the moment, in Auckland. He does not care about Generation Rent. He does not care about the generation that is locked out of the housing market. He does not care about all of the downstream effects on people, right through to people who are living in cars and garages because the housing crisis means that they cannot afford decent housing. The National Government does not care about that.

Treasury said that this bill would, at best, net about $5 million in new revenue, and it said that the small amount is primarily due to the fact that there will be a great deal of avoidance. Because under the bill—it is almost like it was written to encourage avoidance—all that people have to do is hold on to a property for 2 years and 1 day, because avoidance is so easy. If that avoidance was not possible, then this bill would net something like $40 million. But it will net only $5 million, according to Treasury. Because avoidance is so easy, why would you not?

There is some interesting information that the Ministry of Business, Innovation and Employment provided, based on core logic data, that shows that currently in Auckland there is a huge amount of churn going on in the real estate market, but properties that sold within the first year accounted for 8.4 percent of all sales. Within a 2-year period it is 17.4 percent—only 17.4 percent of sales within that 2-year period.

That is why it is going to generate only a measly $5 million, because subtract all of the people who will hold on to that property for 2 years and a day from that 17.4 percent of all sales, and you will see this will make very little difference. And that is why, when the Government announced this prior to the Budget, John Shewan, one of its most respected tax advisers, said then and there: “This will not deter speculators”—

💬 Jacinda Ardern: “Professionally confused”?

“Professionally confused”—there are a lot of great quotes that we are going to share with the House. But that is why he said it will not make a blind bit of difference to house prices, and it certainly will not deter speculators.

I am going to call Fletcher Tabuteau.

Thank you, Mr Chair. You have thrown me into disarray there. I did not expect that at all. I just want to make the point, in starting my contribution to this debate this evening, that we are talking about tax policy that has been introduced with three pieces of legislation, and here we are tonight debating one part of that three-part package. So that in itself puts a huge amount of confusion around just exactly what is being debated tonight, and what will be debated in the future.

💬 Alastair Scott: It’s the second part.

Oh, it is the second part—well done to you. What that member perhaps needs to realise is that in order for this legislation to be enforceable and useful we must and we need to debate the first part or the third part, for example, so that we can have the full picture. I wanted to make that point to the Committee.

This legislation, and I commend Labour’s contribution tonight, is weak, it is insubstantial, and it will not achieve its stated objectives. Treasury has told us that it will not capture the speculator. It told us that 5 years ago. Treasury made a submission to the Government. It said that this type of legislation, this brightline test, will actually not capture the speculator.

Homeownership, without any doubt, in New Zealand is falling backwards. Less and less New Zealanders are able to afford—

💬 Hon Ruth Dyson: Fewer and fewer.

Fewer and fewer. Thank you for that correction; I do appreciate it. So the stated objective of this piece of legislation is to discourage speculation, and with that in mind to bring down the price of property, particularly in Auckland, so that the average first-home buyer can actually buy a home in Auckland. That is the stated objective of this piece of legislation, but it will not achieve that stated objective.

I will just grab a few quotes. Chartered Accountants Australia and New Zealand said quite simply that this is not sound tax policy: “The overall package of reforms lacks the coherence it requires and will not provide taxpayers with the appropriate degree of certainty.” The New Zealand Law Society said that this legislation should not be enacted, as it would not meet the stated policy objectives.

This is not New Zealand First simply standing up and opposing legislation for the sake of opposing it. Unlike this National Government, we listen to submissions, we listen to the experts, and we acknowledge their contributions. To add to that, they told us that this bill would not dampen speculation. Specifically, they spoke to the fact that avoidance would be the main reason for it. So a brightline test gives us that 2-year period. The reality is that speculators will simply avoid that. So 2 years, 1 day—one of the issues that I will talk to, actually, later on in the evening is about that practical application of time: when does the measurement start and what is the 2-year period in actual fact?

The other educational point, for the members opposite—has been spoken very specifically to—is the tax take from this legislation: $5 million. That in itself just highlights how ineffective this legislation will be. I think it was Mr Twyford who outlined the total value of speculation in New Zealand, and the contrast between the take from this, to disincentivise speculation, is just glaring. This bill will not stop rampant house price speculation.

So I just wanted to address Mr Bennett, who said that the intention test will still apply. He was yelling it out quite abusively while someone was contributing this evening. He said that the intention test will still apply. So there is one of the confusing facts that the member needs to be aware of. It has been stated many times that tax needs to be simple and it needs to be transparent and clear. So now we have two pieces of legislation that will run in tandem. We will have the brightline test saying 2 years will apply with all transactions, although I will come to the fact that just what comes into those transactions is a hugely debatable point. But then Mr Bennett told the Committee that the intention test will still apply. It was this Government’s contention—and I will point this out to Mr Bennett—that the intention test is actually supposedly not working and yet he is using it as a reason to say: “Well, it will still apply.”

So the reality is, and one of the contributors put it quite eloquently—I cannot quite reach the quote now, so it is not verbatim. They said that the only people who will be captured by this test are those who are caught by unavoidable circumstances. The reality is that if you are a speculator, if you know what you are doing, and if everything is going well, you will avoid this tax; you will simply avoid it. The point was that the speculation itself will still take effect. So the bill will not achieve what it sets out to achieve.

I was going to come to the point about the date of disposal. I am speaking specifically to clause 4(1), which inserts new section CB 6A, and clause 15, which speaks about the change of the definition of the date of disposal, and it now talks about the brightline date, to avoid complication. Yet I make the point again that this will simply complicate issues. Then I draw the member’s attention to the fact that sales of contingent interests, off-the-plan sales, will have a completely different definition, which runs counter to the intent of the date of disposal section. Within the legislation itself the off-the-plan sales will run counter to the intent, in terms of date of disposal.

And then I want to raise the issue that Mr Cosgrove brought up before, around the definition of farmland. The reality is, as pointed out previously, that farmland in itself will have houses on it. One of the issues raised by submitters was about unused farmland. We are talking about economic units that must be making a profit—that is not quite the right terminology, but they must be ongoing concerns and they must be running as a business, as it were.

But when you talk about a small parcel of land, that would be exempt if it were not used in combination with other land for farming business. The definition in the bill as introduced uses the concept of an economic unit, which would have ruled out such a provision or situation. So I just put it to the Minister that in regard to the definition of “farmland” we have ongoing confusion and we will need further clarification there.

I would like to comment on the contribution from Miss Genter. The reality there is that the definition of “residential land” is that the relevant land-zoning rules would apply. So initially we were talking about how residential land would be defined as including bare land that, because of its area and nature, is capable of having a dwelling erected on it. But, as was pointed out again in an earlier contribution, that definition of residential land, even within councils’ land-zoning rules, is ambiguous and quite broad. Exceptions within that can be brought into play either by those wishing to avoid this or by those who are caught unintendedly because they were not sure of just what is meant in the definition. The courts are going to require a great amount of time to define and outline just what it is we are talking about here. Thanks.

I know that my other colleagues are eager to speak because there is quite a lot to be said about the Taxation (Bright-line Test for Residential Land) Bill. I concur absolutely with those of my colleagues who have spoken previously and have outlined our hope that this bill could have done more but, unfortunately, it has not. No one on this side of the Chamber is disputing the need for action when we have 50-plus percent of the Auckland population renting and the lowest homeownership rates since the 1950s. The fact that this bill has minority reports from every party in the House—almost, I believe, every party on this side of the Chamber—demonstrates the need for there to be great debate on this bill and to highlight the areas where it is lacking.

I wanted to start, though, by speaking on the regulatory impact statement and some of the alternatives that it canvasses in terms of the definitions within this bill. It talks about the problem definition. It outlines that the Government is concerned with high house prices, particularly in the Auckland area. It does highlight property speculation as one of the number of causes of the current prices, and talks about other possible causes, both supply and demand, and says that these have been separately considered—6 years later these are still being separately considered. But on the problem definition around trying to target speculators, if that was the major objective of this piece of legislation, then I am very confused by clause 4 in Part 1, inserting in the Income Tax Act new section CB 6A, “Disposal within 2 years: bright-line test for residential land”. New section CB 6A(1) states “An amount that a person derives from disposing of residential land is income of the person, if the bright-line date for the residential land is within 2 years …”, and then sets out criteria that sit under that. As has been raised in the House, this appears to be totally arbitrary in terms of picking the 2-year cut-off. So I wanted to have a little look in the regulatory impact statement to see the justification for the 2-year line and what the evidence was that was brought to the table in order to determine that 2 years was the place that it needed to be.

On the second page of the regulatory impact statement it talks about residential property churn. It says: “There is significant churn and short term speculation in residential property, particularly in Auckland.” It then goes on to state that there is particular evidence around churn “for new titles and developments in Auckland. The evidence suggests, from 2009-13 59% of all new titles were disposed of within a year and 29% of new developments in North Auckland were traded within 3 months.” That probably speaks to the nature and arrangements of some of this property development, but when you look at existing residential properties and sale of dwellings within 1 year, 2 years, and 3 years, existing properties sold within 1 year represented 8.4 percent of sales, sales within 2 years represented 17.4 percent, and sales within 3 years represented 26.1 percent.

Presumably, if you were genuinely trying to pick up churn amongst speculators, you would have been looking at the greatest reach. That is actually supported, again, by the regulatory impact statement, which canvasses the various options and the cut-offs between, say, 2 years versus 3 to 5 years. Option one, with the 2 years, is highlighted as the option preferred by officials. Option two looks at a longer period over 3 to 5 years. It says: “This option would create a bright-line similar to option 1, however with the period of the bright-line being longer at potentially three or five years … This option has similar impacts as option 1 but with greater effect owing to its longer period. It would”—and this is the important part—“best meet the objective of creating an easy to enforce rule and would have the greatest positive fiscal and administrative impact … However, this option has the greatest risk of capturing sales that were acquired without an intention of resale.” Surely, though, the issue over whether or not you are capturing those that were intended for resale or not is not necessarily about an arbitrary time line but around your use of definitions. Your definitions are what determine what is in and what is out, not just the time line over a period of which someone wishes to resell.

I want to come back to clause 6, which then goes on to talk about some of those definition issues. It seems clear that if the primary objective as set out in the regulatory impact statement was indeed around trying to ensure that we are cracking down on speculators and where there was the greatest churn, that actually the Government would have gone for a longer period. That is the reason we are supporting Supplementary Order Paper 138 before this Committee, which seeks to extend that period, because that would have the greatest impact. But, again, issues around definition are particularly important. I think it was the member from New Zealand First, Fletcher Tabuteau, who rightly pointed out that there is a real contradiction when we are talking about trying to create certainty, because the Minister of Revenue’s commentary on the bill points out in the overview that the Government announced plans to introduce a new land sale rule to supplement—so not to replace, but to supplement—the intention test in the current land sales rules. The intention test makes gains from the sale of land taxable when bought with an intention for the purpose of resale.

This intention test is difficult to enforce due to its subjectivity. So one would assume that the bill in clause 6 should step away from any subjectivity, but in that clause it talks about the main home exclusion and the fact that any disposal within 2 years does exclude the main home. But if you are looking at how the bill then defines “main home”, the main home exemption, as talked about in the commentary of the bill, states: “As introduced, the bill would exempt a person’s main home from the bright-line test. Where a person has more than one home, the main home would be the one with which they have the greatest connection.” No wonder submissions from the public, including from tax specialists, called this “professionally confused”. With clarity and without the subjectivity that was brought about by the intention test, how do you define something that you have the greatest connection with? As someone has described previously, I think, it is a bit like The Castle, where you are talking about the vibe of the thing.

💬 Chris Bishop: Oh, here we go.

Chris Bishop, I would be very happy for you to stand up and give us a full explanation around how you define the greatest connection with a home, and whether it is, in fact, the vibe of the thing.

Let me put a scenario that would be picked up by Part 1. If, for instance—

💬 Chris Bishop: It’s very easy. It’s based on case law. It’s leading case law.

Oh, it is based on case law. So we have to go through the courts to establish what Parliament is unable to define. That is poor lawmaking, and the member knows it. The member knows it. If accountants and lawyers are telling you that this will be tested in the court, you know you have made bad law in that sense. You know that you have.

I would like to put a scenario to the member. If, for instance, an individual is living in a home and goes on to purchase another home, and chooses that they are probably going to dispose of that because it has made enormous capital gain, could they technically move into that home for the last 3 months before they dispose of it and claim a connection to that property as their residential property? Could that happen? I imagine it probably could because this is an entirely, as I say, subjective test, and surely your connection is the fact that you are a resident within it, even if you are a resident within it for a 3-month period or a 1-month period, purely in order to satisfy this completely subjective test that has been set out before us. So that is something I would welcome the Minister of Revenue clarifying for me—whether that scenario that I have put forward could reasonably demonstrate connection to a residential property, even if an individual had an additional property that they were then tenanting, which was their prior residential property.

I think that points out the problem with the definitions. As we have stated, the regulatory impact statement was saying that longer periods would pick up a greater amount of churn, so surely part of the issue is actually the definition rather than necessarily the period of cut-off. I would like some members from the other side of the Chamber to stand up and tell me how that will make a difference. I would also like to highlight that within the regulatory impact statement it is talking about the fact, under the fiscal impacts, that it would be difficult to quantify the fiscal impact of the 2-year bright-line test because of “the number of sales that would be delayed in order to exceed the 2-year holding period.” Officials are acknowledging that the system will be gamed by speculators to simply get around this flawed bill. That is a complete lost opportunity, when we have a housing crisis in Auckland.

I think the heart of the issue in this debate is really about fairness. We have a problem with our existing tax law in that it is not entirely fair and it favours investment in property over other types of work and income. It is a problem that we all acknowledge and we all need to address.

Of course, Treasury, the Reserve Bank, and many economists have been calling for action on this issue for a number of years, and, understandably, Governments have had a hard time taking the steps to close the tax loopholes on property because it is going to affect a number of people. But there has never been a more urgent time for us to come together across the Chamber to find a constructive solution to this problem.

I note that even just this week the IMF came to New Zealand on a mission. It made some specific statements about tax measures. It stated: “The newly introduced measures to deter speculative investment are welcome, and further steps in this direction should be envisaged. In addition, a more comprehensive reform to reduce the tax advantage of housing over other forms of investments could be warranted. This could include reducing the scope for negative gearing.” That is what the Green Party is saying here tonight.

I know a number of my colleagues on this side of the Chamber agree that this legislation could be improved to deal with this problem, and I am sure there are a number of members on the Government side who agree that this legislation could be improved to have a beneficial impact on all New Zealanders in the long term.

I have asked them to consider tonight these very, very humble Supplementary Order Papers. They are not particularly ambitious. They are pretty minor changes, but they would significantly improve the bill. We have Supplementary Order Paper 138 extending the time frame from 2 years to 5 years, as originally advised by Treasury. This is a compromise measure. I am putting this forward as a compromise. This is not the Green Party’s policy. We would like to see a comprehensive capital gains tax excluding the family home, which we think would be better because it is only fair that income, whether it is earned by a job or whether it is earned from the sale of a property, should be taxed in the same way. We think that is fair.

But I have come tonight with a compromise measure—it was Treasury’s compromise when it put it forward in 2010—to have the brightline test apply for a 5-year period so that it is much more effective. I know that Mr Bennett has said tonight: “Oh well, you’re still going to have the problem that speculators will hold on to 5 years and 1 day.” Well, I think we can all agree that there is a big difference between holding a property for 2 years and holding it for 5 years—in fact, there is a 3-year difference; it is more than twice as long. It would be substantially more effective at slowing the churn, and that is important to limit the fast pace of the growth in house prices in Auckland.

It is true that speculators can be land bankers and they can hold property, sometimes, for very long periods of time, but slowing the churn will slow the growth, which slows the damage that could potentially be caused when the bubble finally bursts. So it is not a dramatic move. It would just be in line with the vast majority of OECD countries that have holding periods of at least 5 years. There are very few that have less than 5 years, and they also have problems with property bubbles. So I ask the Government to consider this constructive contribution from the Greens—I know that other parties will be supporting it—so that we can have a better bill.

The other change, of course, that we are proposing tonight is that this applies to all land, not just to residential land. It will be more coherent, there will be fewer loopholes, and we will not have to deal with this extremely tricky problem of how we define residential land because, ultimately, land can be used for residential purposes. Even if it is not currently being used for residential purposes, even if it is not currently zoned for residential purposes, it can, in fact, be used for residential purposes.

So to clean up this legislation there are minor improvements proposed tonight by the Green Party. I hope that the Government will consider listening to us because we do want to have the best outcome for New Zealand. If we are going to go through the steps of passing this legislation, it may as well be as good as it can be.

Even if it is not our policy, we are willing to support this bill. We are voting for it, but we think that it could be improved. In line with many of the submitters’ comments that we heard at the Finance and Expenditure Committee, our proposals are not particularly drastic, and they are not even out of line with the advice that the Government itself received from Treasury a number of years ago.

I will make one final comment about this package of bills, because this is the final piece of legislation in a package. We tried to make constructive improvements to the previous law—

I move, That the question be now put.

We are supporting this bill, but only because it is the tiniest—tiniest—conceivable step in a very important direction. It is hard to imagine an issue more central to New Zealand’s economic and social future than the way we are dealing with the rampant house price inflation - property crisis. Labour colleagues are going to be taking a large number of calls on this bill because it is so important to New Zealand that we expose the “why?”, the “what is wrong?”, the “what does this bill do?”, the “will it work?”, the “is it sufficient?”, and the “what else needs to be done?”. We are going to dive down, at considerable length, to the clauses that are contained in the various parts of this bill. This is an introductory set of comments because we are on Part 1—the first clauses—in the Committee stage.

Why is this a crucial issue? It is simply because there is nothing much more important to New Zealanders and our Kiwi families than achieving the Kiwi dream of homeownership. People pay their mortgages for years and years and years, and that dream is slipping away. How we do know? Because homeownership rates are lower today than they have been at any time since—would you believe—the 1951 waterfront strike.

💬 Hon Ruth Dyson: Lockout.

Lockout—exactly. The year 1951 was the last time New Zealanders had as little homeownership as we do today. That is a tremendously awful statistic. Why is it? In Auckland alone there has been a 27 percent increase this year in the cost of an average house in my area of Waitakere City. Why do I know? Because I am trying to buy one at the moment. There has been a 27 percent increase in 1 year. A house earned more than almost every worker in the country. Can an average Kiwi family afford an average home, on an average income, in Auckland? Are you kidding? Are we kidding? Of course an average family is locked out of the property market.

The second key thing is that when Kiwis do get a home of their own, under the current tax laws, which help inflate house prices, they are going to stay poor for longer. According to Shamubeel Eaqub’s book Generation Rent, whereas a few years ago we were paying on average 30-year mortgages, housing is now so expensive that families are paying for 50 years to pay off a home—50 years. New Zealand families are poorer because our property tax system is so, so broken.

Why else does this matter? New Zealand as a country will stay poor until we put more capital into productive investment and less capital into bidding up each other’s ridiculously overinflated housing prices. Why is the Government not doing more to solve the most important economic problem in New Zealand? I can only see, and we will work through the analysis—

Sitting suspended from 6 p.m. to 7.30 p.m.

Good evening to colleagues and to viewers. Before the break, we were reflecting upon the context for this actually very important and significant tax bill. This is the brightline test that says that if you sell a property that you are not living in, minus a few exceptions, within 2 years of buying it, you pay tax on it as a trader—or, at least, that is the high-level plan. Before the dinner break we were noting that that is one way into a very, very important issue for New Zealand.

That very important issue is the twin catastrophe of the housing crisis, which is locking young families out of the Kiwi dream, and the misallocation of investment capital, which means that, basically, we are spending all our money bidding up each other’s house prices, often through speculative investment, enslaving ourselves to the mortgage for longer, and not investing in the productive investments that will create jobs and incomes for the future. That is an absolutely central issue to the problems of the New Zealand economy, and unless we fix it we will, quite simply, be poorer in years to come and our children will have fewer opportunities.

So now the question is whether this bill helps materially. My colleagues and I will answer that by taking quite an extensive range of calls. This is a really important and detailed bill. Let us begin by asking: “What does the bill actually require?”. Well, it has got a 2-year brightline test from the date that a person takes title. That brightline test will apply only to residential land—that is, to residential real estate. It does not apply to business property, and it does not apply to farmland. That is a very, very important distinction, because residential mortgages are about 53 percent of the total bank mortgage stock, farm mortgages are a little over 20 percent, and business working capital and business mortgages are about 16 percent. So the definition excludes around about half of the mortgage stock.

The brightline test does not apply, of course, to a person’s main home. That is important, and we agree with that. We have never thought that there should be any form of capital taxation on a person’s home, because it is not just an investment. The brightline test will not apply to property acquired through an inheritance. We also concur with that. When we were working on capital taxes earlier, we did not have a disguised inheritance tax there either. Losses arising from the brightline test will be ring-fenced so that they may be used only to offset taxable gains from other land sales. That sounds good, but it is actually, as we will show later in the debate, a very broad ring-fencing provision, which reduces the coverage of the bill.

At a high level, what are the issues with this bill? Let us start with how much it is going to achieve. According to the Government’s advisers—Treasury and the Inland Revenue Department—this bill, when fully implemented, will take how much tax in a year? Five million dollars. Five million dollars for a property tax across New Zealand in a whole year? Are we kidding? What is that? Two houses in Auckland? It is almost impossible to imagine how a number so small could have even been estimated or calculated. Upon what possible basis could $5 million have been the result? So that is the first clue, ladies and gentlemen, that there is something deeply wrong with the design of this tax. Five million dollars a year—it is a tax you have when you have not got a tax.

OK, so why is that? Well, the first thing is that, of course, if it is a 2-year test, speculators will hold for 2 years and 1 day and then sell on. At the moment, 17 percent of property sales occur within the first 2 years, but we would expect that to change drastically with this bill becoming law, because people who are holding for a year and a half will simply hold for 2 years and 1 day. It is highly ineffective because it is very easy to game—very easy. It is a massive loophole. It just invites speculators to hold on to their properties and then flick them 2 years later.

A tax that applies only to sales in that arbitrary period will not deter land bankers. That is really important because, as Mr Twyford has often exclaimed, for the last couple of years there has been only a handful of homes built on the Government’s special housing areas. One of the reasons for that in Auckland is that people are land banking, even in special housing areas, because with Auckland’s rampant price inflation, they can be pretty sure that their investment is going to be worth more a couple of years down the track. Again, this bill will do absolutely nothing to fix that.

The brightline test has been made even weaker by Cabinet agreeing to exempt New Zealand residents from providing their IRD number when buying or selling a house. Well, that is kind of odd, because you have to provide an IRD number if you are transacting assets in or out of a trust. You need an IRD number if you are transacting assets in or out of a company, but you do not need an IRD number here if you are a resident, which means that that applies to people who are not even citizens.

That is a very, very odd exception for Cabinet to have agreed to, and the Minister in the chair, the Hon Paula Bennett, who is the understudy finance Minister, will be able, I am sure, to leap to her feet with alacrity and a lot of enthusiasm and explain to us why on earth they have that mile-wide exemption. The Government ruled out a more comprehensive 3-year test or a 5-year period, despite Treasury earlier recommending it, because it could be interpreted as a capital gains tax. Well, although we do not want to use those three words in the same sentence, the whole point of this is to tax speculation, so if it does not do that effectively, then it is probably not worth having.

Let us ask ourselves: if, in the broad design, this tax is so flawed from the outset that it merely nods at the problem but does nothing to solve it, then why have we got it here on the House floor? As a colleague said before the dinner break—I think it was Mr Twyford—that is because this is National’s stock and trade: the Government resists pressure for change to the point where the focus groups tell it that it is intolerable to do nothing. Faced with that pressure, it does something, usually almost nothing, and that is what we have here.

The only reason we are supporting this is that almost nothing is about $5 million better than absolutely nothing, which is what we had before. But almost is only almost. That is the unsolved mystery of the bill, and the Minister may be able to explain Cabinet’s rationale. Why would this Government design a tax that is so useless? Who benefits? One thing you have got to say about the current Government is that you know it may be doing the wrong things but usually there is method in its madness.

So who are the beneficiaries? Well, I can think of some. It certainly is not Kiwi mums and dads, because they are going to be paying more for their mortgages and slave for 50 years, not 30. It sure as heck is not Kiwi kids, because most of them will be growing up in rented homes that they can be kicked out of on a whim, on a month’s notice, by their landlords—and they will swap around schools, and so on and so forth, and the effects will be felt throughout their lives.

So it is not Kiwi kids. Is it real estate agents? Well, yes, it probably is, because this tax does not quell the property market, so they will be riding that bubble as they always were. They certainly are not losers here. Is it the banks? Ah! Maybe here we are a little closer to the heart of the onion, because the banks are experiencing record profitability off the housing and property boom. If you think about it, if your family is taking out a mortgage for 50 years instead of 30 and you are paying interest for the extra 20, then it is the bank’s profitability that will be lifted, particularly in a low interest rate environment as we have at the moment. So it is not Kiwi kids and it is not mums and dads. It is probably the banking system and, of course, it is the property speculators.

I would invite the Minister to reassure the Committee that this bill was badly designed by accident rather than design. There is a rebuttable suggestion that this is a deliberate sham that has been designed to look like the Government is doing something when it knows full well it is not. And the reason it is not is that the powerful interests in the financial system and the property sector have made damn sure it will not, even though it knows it would be in the interests of every Kiwi family to have a more effective piece of legislation than the one we are called upon to pass into law through this bill.

So Labour MPs and our colleagues on this side of the Chamber will be drilling into this piece of legislation over this evening as we go through the Committee stage. We will go through it part by part, clause by clause, comma by comma, and we will expose for New Zealand why it is not effective, why it cannot be as effective as it needs to be, and why that $5 million a year for the whole country is really just the cost of a public relations stunt. This is a public relations stunt, not real tax law. The members opposite know in their heart of hearts that this is really a tax joke. They know this is not going to make a blind damn of difference to the Auckland property bubble or anything else. All it does is let the National Government off the public relations hook in terms of a rising tide of angry parents and angry householders who are worried sick about meeting their mortgages or being tossed out of their rental accommodation.

This bill is a political bill. It is not a substantive tax bill, despite the fact that it has taken the time of officials, the select committee, and this House—and we will do justice to that process. There is no doubting that this bill is not an effective piece of legislation. Labour is supporting it only for the reason that we wish to send a signal that the problem to which this bill supposedly addresses itself is one of the utmost importance to the New Zealand economy and our society.

I can assure the Committee that there is no one more surprised than myself that I am taking a call on a taxation bill, but I assure you that I will give it my best shot. There is a very good reason I want to speak on this bill, and that is that the intent of this bill is to take the heat out of the speculation in the Auckland housing market. There is nothing more difficult at this stage than people trying to buy their first home in the Auckland housing market.

I want to acknowledge that the Finance and Expenditure Committee obviously had quite a difficult time because the process was truncated. I am sure that the people who wanted to submit on this bill could have if they had been given the right opportunity and the time to consult widely, rather than just being given 10 days to make their submissions. If that had been the case, we may have come out with a bill that really did hit the mark in terms of taking the heat out of the speculation, particularly in the Auckland housing market.

The bill, right in its name—the Taxation (Bright-line Test for Residential Land) Bill—tells us that the brightline test applies. I admit I had to go and look up what a brightline test was. As I understand it, it is a judicial rule that will help restore ambiguous issues by setting a basic standard that clarifies the ambiguity and establishes a simple response. So right there, right up front, at the very beginning, in the title of the bill, is the intent of this legislation—to clarify any ambiguity and to establish a simple response.

So what I thought I would do is actually use this test in terms of some of the provisions of the bill. So let us start off with the definition of the “main home”. I admit I found it a little unusual to be looking at the definition of the main home when looking at the exemptions, where the property owner may own more than one property, one home. But the main home would be the one that they have the greatest connection to. I guess if you are to use the test from that famous Australian film The Castle, you are thinking about the one that gives you the vibe. It is the one that has the vibe. But when you are asking officials from the Inland Revenue Department to make a determination about what the main home should be, should you not have a stronger test than the home that gives you the greatest connection?

Then we look to the fact that this bill covers only residential land. It does not cover farms or commercial land. It just covers residential land. But under the definition of “farmland” in this bill, it says farms but not lifestyle blocks or hobby farms. So if we were to apply the test of establishing a simple response and clarifying ambiguity, what is the difference between a farm and a hobby farm? Is it how much income the farm takes? Is it the size? There is no clarity around that, and if the Minister in the chair, Minister Bennett, is of a mind, it would be great if she could give us some clarity on that.

Next I want to have a look at the date of disposal. In terms of applying the brightline test to that, within the definitions, the commentary on the bill states: “We recommend using the term ‘bright-line date’ instead of ‘date of disposal’ ”. I am unsure what the difference between those two dates is, and again I seek clarification from the Minister. It would be very good to know what that is.

My colleagues have already talked about the intent of this bill being to curb speculation by requiring any properties that are held for 2 years or more to, when they are sold, be subject to tax in that period of time. But we have also heard that about 17 percent or 18 percent of properties come up for resale within that 2 years—actually within 17 or 18 months; that is what has been told to the select committee. But Treasury has recommended 5 years. We can be fairly sure that anyone who is interested in purchasing property for the sole purpose of making money from it will just hang on to that property for 2 years and 1 day before they sell it.

But there is a real danger that some people will be caught unintentionally within that 2-year period, and they will be, for example, those for whom there might be a matrimonial property issue, or people who may have had some financial concern that would require them to sell off the additional property. When we look at how much this tax—and it is a tax; let us be clear about that—is likely to achieve each year, we are looking at $5 million. I would suggest that the $5 million is actually going to come from this cohort of people, who are not in a position to purchase homes for speculative gain. The people whom are not intended to be caught by this are those who have matrimonial property disputes. I suggest that that is where the bulk of this $5 million will come from.

If we are actually looking to take the heat out of the market, we would be looking to the longer period that Treasury has recommended, which is the 5-year period. As a previous speaker has already said, about 8 percent of homes are sold within the first year, and 17 percent or 18 percent are sold within 2 years, and, then, for homes resold within 3 years we are looking at about 26 percent. So if we are really looking at being intentional with regard to ensuring that we take the heat out of the Auckland housing market, this Government should actually do the right thing, which is to take Treasury’s recommendation and move the period from the 2 years currently to 5 years. There are other issues, I am sure, that will come up during the course of this debate, but, at this point, I thank you very much for the call.

I move, That the question be now put.

The definition of the brightline rule, or the brightline test, describes it as being composed of “objective factors”, which leaves little or no room for varying interpretation, and the purpose is “to produce predictable and consistent results” in its application. I think that you could describe this piece of legislation as being the very opposite of that test. So it is not a bright line; it is a very muddy, clouded line that is being produced by this Government as its way of doing something about the rampant speculation in the Auckland housing market and the impact that that is having on our country and our country’s economy and the ability for New Zealanders to afford to buy a home, to afford to rent a home, and to be able to get ahead in this life. What this Government is doing with this legislation is just turning it into a political stunt—an absolute political stunt—that will require this House, within the next couple of years, no doubt, to be looking at this again because it is so token and so inadequate.

With particular regard to Part 1 of this legislation, there is the test at clause 15, the test that goes to residential land only; clauses 6 and 15, which exclude the sale of a person’s main home from the test; clauses 4 and 11, which exclude inherited property from the test; clause 10, which excludes the transfer of property as the result of a relationship breakdown; and so on, and so on—the point being that the test of a brightline is there for consistency and for there to be no or very, very little room for inconsistency in that objective test.

Despite the fact that there was a very truncated period for the Finance and Expenditure Committee for the hearings and submissions on this bill, there were some very good submissions on this bill. Almost all of them questioned the objectivity, the objective test, and the consistency of the brightline test, which is why we are going to see this legislation back in the House again.

I want to refer briefly to an article by Terry Baucher—which, no doubt, other colleagues have mentioned—who is an Auckland-based tax specialist. He makes the very good point that good tax policy takes steps to remove inconsistency and improve coherence. Well, this legislation is not doing that.

My concern particularly—because I know that colleagues are speaking about other aspects of this bill—is about the number of people who will get caught up in this legislation who should not be caught up in this legislation, and about where the grey and muddy, clouded areas will affect them. My concern is about the people who make the decision to sell the home that they have bought within that 2-year period because of personal circumstances and who have no idea of the impact that this legislation will have on them. This legislation has no regard for them or for the impact that it will have on them. Whether they are people who have somebody die in their family, who have a divorce in their family, or for whatever reason, there are unintended consequences from this piece of legislation. That is one of the reasons—

I move, That the question be now put.

Because of the rushed and truncated time frame for this bill and the fact that it is going to be retrospective, we are in the unusual situation of being here at the Committee stage of the bill with the bill, basically, having been in operation for the past month.

When Quotable Value released its October data last week, it was quite extraordinary because it, basically, gave us a snapshot of whether or not the bill has had any effect. Of course, the effectiveness of the bill is one of the things that we are debating here and is one of the things that almost all of the submitters at the Finance and Expenditure Committee put a big question mark on over the bill. What we saw when the numbers came out last week was that prices in Auckland rose by $21,500 in the month of October and hit a new high of $918,000 for the average price. So you have to wonder whether or not this bill, in all its glory, is being very effective at all, based on its first month in operation.

I think one of the most interesting quotes from the submitters was from the senior tax specialist who came along to the select committee and said that he was professionally confused by the provisions in this bill. A number of others said that the brightline test was a bad idea, incoherent, and ineffective. I think people will be getting a little bit of the drift of the response of submitters at the select committee.

The provision that demonstrates, perhaps, the level of confusion underlying this bill is, I think, around the so-called “main home”. I am talking about clauses 6 and 15(5), (10), and (11). The main home provisions in this bill have carried over from the non-resident foreign buyers’ legislation that was passed recently. This is a very confusing situation around the main home. The bill, basically, requires that the land in question be used predominantly as the person’s main home and that it be used as their main home most of the time. In the situation where there is more than one home that could be subject to income tax because it has been sold within the 2-year period, that is where we really start to get into the good stuff in this bill.

The bill applies what it calls the “greatest connection - test” to determine which of these two properties is the person’s main home. The greatest connection - test determines, on an objective basis—which is a bit of an oxymoron in this case—which property is the main home, and it applies the following criteria: the time the person occupies the dwelling; where their immediate family, if any, lives; the person’s use of the dwelling; the person’s employment, business interests, and economic ties to the area where the dwelling is located; whether the person’s personal property is in the dwelling; and then the coup de grâce is where their social ties are strongest.

Can you imagine how much work this is going to generate for tax lawyers in the leafy suburbs of Auckland, as they attempt to make sense of these overlapping and vague definitions about which of two homes may have the greatest connection and, therefore, which one the person would be able to apply the exception to?

It is completely confused. It does not actually use the existing established definitions in other comparable legislation—that would have been much simpler. In this case, the Government has chosen to apply the vaguest and broadest definitions, provide a little guidance on the side, and hope that somehow that will deal with the sheer complexity and variety of situations that this law will have to be applied to. The whole issue around “main home” is in fact Mabo—it is the vibe. This bill is a tribute to The Castle. As previous speakers have said, we will be back here fixing this up. It was a rushed, chaotic, and hurried political response to the problem of speculation in Auckland.

I will just give the Committee a bit of an indication. We are even starting to hear the jokes being repeated now. The fact is that there have been 18 calls from the Labour Opposition, there have been another 5 calls from the other Opposition parties, and 3 closure motions from the Government. Actually, if the new material is not novel in any way, it will not be lasting long. I have given some latitude, bearing in mind that the guts of the bill is in the first part, and I am not expecting the second part’s questions to be lasting as long, by any means. I call the Hon Clayton Cosgrove for his third call on this bill.

I give you an absolute commitment that I will not crack any jokes. I do note in passing Assistant Speaker Mallard’s ruling last week when he allowed, as you have, Mr Chairman, very generously, quite a bit of latitude where questions were posed on a piece of legislation and Ministers failed to answer any of those questions.

But moving on, I want to deal with a critical part of the proposal, and this is in regard to the 2-year period when it starts and finishes. The Taxation (Bright-line Test for Residential Land) Bill proposes that the 2-year period should start on the date of registration of title, rather than the date of entry into the sale and purchase agreement. On the face of it, you may argue that that is a logical way to go, until you actually look at what submitters were particularly critical of. They were critical of this part of the bill because it differs in the general definition used for purposes of the land provisions in the Income Tax Act. I suppose in plain English that means, again because of the rushed and hashed nature of this legislation, that definitions that have no case law attached to them and that are not consistent with the Income Tax Act have been put in here.

I will give another example. In its submission to the Finance and Expenditure Committee, on the issue of coherence with current land rules, Chartered Accountants Australia and New Zealand submitted that “The concepts underlying the bright-line test and other reforms and the definitions relied on should be consistent with those in current land rules.”. So, essentially, in plain English again, it is saying that the definitions you put in this piece of legislation should be consistent, if you like, with the Income Tax Act—I would have thought that the Inland Revenue Department would have said “Yes, that makes sense”, because we have an abundance of case law in respect of a whole host of definitions—and in respect of the Land Act, because again we have a whole host of case laws around the definitions. But hey presto, in a sort of David Bennett turbo-boosted special we ram this thing through, and there is a total inconsistency in definitions.

I would have thought that when you have Chartered Accountants Australia and New Zealand ringing alarm bells around this, the Government would have looked at it and said: “Hang on, we’ve got to get this right.” I do not blame the Inland Revenue Department officials, because they are under instructions from Ministers, but you have got to say that this legislation breaks new ground in the level of critique from the private sector taxation profession, right through from—as my colleague talked about—the definition of “main home” to the exemptions around farmland and to a whole host of aspects that colleagues have debated here tonight.

As I said in my first contribution, tax law at its essence has to be simple for people to understand, it has to be transparent, and very rarely should it ever be retrospective. But we have a whole series of definitions and new terms here that have essentially been invented. The difficulty is going to be, as the Chartered Accountants Australia and New Zealand pointed out, that this whole piece of legislation lacks coherence and lacks any sort of case law around it. There is an invention of new law. In the old days this sort of stuff would have never got from the Inland Revenue Department to the Minister’s desk. No disrespect to the officials; it would have never landed on the Minister’s desk, and if it did, certain officials—learned officials, who had 30 or 40 years’ experience—would have kicked this for touch and would have said: “Minister, there is no way on this God’s earth that this legislation is actually going to work; it’s out.” We have had a litany from revenue Ministers, whether it be the car-park tax that got booted or the tax on computers that got booted—it was a laughing stock—and now we have this.

Although on this side of the Committee we say that we commend any measure, minimal though it may be, to crack down on property speculation and give folks, not only in Auckland but right around the country, the ability to get into their first home and have a fair go, you have got to say—and it is not just politicians saying it. Discount everything we say on the Opposition; just discount it and throw it out in the bin if you want, but you have got the profession speaking, from the New Zealand Law Society to Chartered Accountants Australia and New Zealand to Ernst and Young, and on and on it goes. These folks generally, I think, are not political. They are pretty honourable people, they are very learned in their profession, and they have said through nearly every aspect of this bill—the definitions of “main home”, the farmland, and the definitions that I have called out—that it simply will not work.

Tēnā koe, Mr Chairman. Tihei mauri ora! At the end of my speech, I want to speak a little bit on mauri, and the determination and the notion of mauri when it comes to determining the main home. But first of all, I want to talk about the speculators.

I do not believe that there is a test within this bill that adequately identifies and determines what a speculator is. Surely it cannot just be based upon the length of time that one owns a property, and then suddenly after 2 years and 1 day you are no longer a speculator—well, I would beg to differ on that. I believe that we need a test in here that determines what a speculator is on the day that they purchase that particular property. I would further suggest that the test ought to be: is there intent to sell that home; and are they a New Zealand citizen based in New Zealand, or are they offshore and purely in this to make money? That should surely be the test—not the length of time. I suggest that that ought to be the test.

I also wanted to bring up the matter of the submission from the New Plymouth District Council, which the Finance and Expenditure Committee has, I believe, adequately addressed in determining that the leasehold homes in Waitara on the Pekapeka Block will, in fact, be exempt should the occupants—the leaseholders—purchase those properties. I believe that is the right thing to do. But I bring that up because, at another level, it also highlights the truncated process that the select committee was forced to go through for this retrospective legislation. I wonder how many other potential homeowners or leaseholders out there are not covered by this legislation, and so I ask the Minister in the chair, the Hon Paula Bennett, whether she can give us some assurance on this very issue.

We have heard from my colleagues on the issue around what the main home is. I have to say that, from my perspective—I have many whare, like a lot of Māori. I have to say that I find this argument quite silly—

💬 Clare Curran: It’s ridiculous.

—and, as my colleague Clare Curran has said, ridiculous. And I will tell you why. The reason, as I see it, and looking at it through Māori lenses—you would surely see that one whare being more important than the other—well, we do not look at the world like that. And so if we are using—some of my colleagues have referred to the word “vibe”. Well, we would call it mauri, and the mauri of how you feel about your mother’s marae and your father’s marae can equally be placed in terms of homes. How do you quantify that? I would love to hear from the Minister on these issues. How would you determine that one is greater than the other? As my colleague David Cunliffe has already said, I think we will see this piece of legislation back before the House before 2 years is up.

That is my contribution to this first part. I hope to take another call in the second part, but, for now, thank you very much. Tihei mauri ora.

I move, That the question be now put.

I raise a point of order, Mr Chairperson. I seek leave to correct my incorrect vote that I just made.

Leave is sought for that purpose. Is there any objection? There appears to be none.