Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill

Members, we turn to the debate on Part 2, which is the debate on clauses 4 to 185B and schedules 1 and 1B.

Thank you, Madam Chair. Let me just agree with Amy Adams on a couple of things she said in her opening contribution. This is a good piece of legislation. We had robust debates about this, normally at the Finance and Expenditure Committee. It went through the select committee process. We all agreed; it was a bill that I took over from the Hon Judith Collins—and it makes the tax system easier. But what I’d like to talk about in the majority of my contribution is a Supplementary Order Paper (SOP) that I have introduced, and this is about extending the brightline test from two years to five years.

Now, what I’ve heard this afternoon is a whole lot of people talking about how investors are going to get caught by this brightline test, but I dispute that. I myself own rental property, and I don’t consider myself to be a speculator. I’m an investor. I have bought the property to hold on to for rental yield.

Before the two-year brightline test came in, we had something that was called the intention test in the Income Tax Act. What the intention test was based on was the intent of the purchaser of what they were buying that property for. If the intent of the purchaser was to buy that property for capital gains, then the investor—the purchaser—had to pay capital gains tax on that property when it was sold. If the investor, or the purchaser, bought that property to make a rental yield, then they did not need to pay tax on the profit of that property when it was sold. What we found—when I say “we”, what the IRD found—was the intention test was almost impossible to police, because all anyone needed to do was say, “Well, you know, I bought this property for a rental yield. My circumstances have changed within six months. I’m going to flip this property on.” What we found was that speculators were getting around having to pay capital gains tax because it was almost impossible to prove their initial intention when buying a property.

So what happened was the last Government introduced a two-year brightline test, and that was done in 2015. On the select committee that considered this was David Bennett, Andrew Bayly—who’s spoken—Chris Bishop, Clayton Cosgrove, Julie Anne Genter, myself, Winston Peters, and Grant Robertson. Now, we heard numerous submissions on this. We went through this full select committee process and heard a number of arguments for and against. But one thing I will say is that the Labour members on that select committee, in all the speeches we gave when we were debating this bill in the House, talked about the fact that two years was not long enough and it had to go to five years, and the reason we said that at the time was because, even then, Treasury could not determine how much money this was going to bring in.

There was so much uncertainty about it that we did not think it was going to provide any real, meaningful change in behaviour. Speculators were still going to buy those houses and hold on to them for two years and one day and still flip them on, and, in fact, we have seen a lot of that continue. In fact, it is interesting. Even just looking at the consequences of the two-year brightline test at the moment, the IRD gets all information on land sales, and what we’re finding is 50 percent of a small sample that they looked at had not complied with the rules. These are speculators. Investors are not going to get caught under this.

We believe—I believe fully—that investors are the sorts of property owners who buy a property and who hold on to it for rental yield, as per the purposes of the Income Tax Act, and then sell it after five years. They’re holding on to it for the true purpose of rental yield, not to flick it on. We always felt that two years was not long enough. We actually signalled this throughout the election campaign, we signalled this when the bill was in the House, and we’ve signalled it ever since. So it should come as no surprise to anyone that we have made this change through this SOP 13 to take the brightline test from two years to five years.

The other thing I’d also like to point out is the amount of money we think this will bring in and the amount of people we think this will affect. We think it’ll bring in an extra $50 million and we think it’ll affect perhaps another 2,000 people. It’s not too many more, but it will get those people who were buying and flipping properties. It will get those people who should be paying tax in the first place. The reason that this is important is because we believe that if you are making income out of selling rental properties, you should be brought into the tax system. So this is about enhancing the integrity of the tax system—most important—because we felt there were too many people who actually were getting away with not paying their fair share.

So we’ve heard the arguments. They were presented in front of the select committee. We know what they are. We think this is the right thing to do.

Mr Chair—Madam Chair, sorry. Apologies—

CHAIRPERSON (Poto Williams): That’s all right.

—for the wrong gender.

This particular part of the bill is one which we would normally wish to support, particularly when the work was done when I was the Minister of Revenue, by the excellent people at the Inland Revenue Department. I am, however, deeply concerned that this bill is being hijacked, and to hear Minister Nash, who’s just resumed his seat, speak in such glowing terms about all the money that they expect to get from it tells me that this is definitely a Supplementary Order Paper that’s been attached to this particular part of the bill that should go to the Finance and Expenditure Committee and should be properly debated. It’s all very well for the Minister to say, “Well, the brightline test was debated under a previous bill.”, but the problem is that this is a different brightline test. The effect is far more wide ranging and far more intrusive on New Zealanders. I think there’s also a good opportunity in a select committee for the administration costs of having to administer this new tax that Labour wants to bring in to be considered.

I well remember that there’s been the Tax Working Group that’s been set up, and I have been assured time and time again in the Parliament that there will be no new taxes before this Tax Working Group reports back. Well, here’s a brand new tax now that’s set to come in, and no one gets to have a say. So what happened to the Tax Working Group? This is just a working group to find even more ways to tax. There was nothing in the contribution from the Minister about how to grow the economy and nothing in that contribution about how to grow the number of houses that can be built. There was nothing in that contribution about everything that people should be considering, which is how to actually grow the economy. What it was all about was “Let’s take $50 million off mum and dad investors because they’ve got too much.” It is, yet again, another attack on people who pay their bills, save some money, put themselves at risk, and actually want to invest.

I have no problem with people who are in the business of buying and selling houses paying tax. They are already taxed under the Income Tax Act. They already have it, and I recall from my days of university learning and doing a Master’s in taxation studies at Auckland University that it was, I think, about 1976 when that came in. It was maybe a little bit later than that, but it’s not that far off. It was certainly in that decade. It’s already taxable. The point that the Minister may wish to make—and, no doubt, is now wishing he had made—is: if only we knew that people are buying and selling properties, then we’d be able to tax them if their purpose is to buy and sell properties.

Well, under so many of the changes that our Government made around the administration of tax and the huge input and funding that we gave to the Inland Revenue Department around the digitalisation of so much of what they do, all of these sorts of things would be much easier to pick up in the first place. I am very concerned that such a substantive and substantial change to our taxation system is being brought in, and if I wanted to be dramatic, I’d say just before dinner time on a Tuesday with no notice at all to the public. But I’m not going to be dramatic about it; I’m going to say, quite clearly, that this is another attack on mum and dad investors and people who are the small landlords. So much of what this Government does is actually about attacking those very people who are the backbone not only of our economy but also of our communities. These people deserve a lot better than the cursory “Well, we looked at it once before and you had your opportunity to have a say then.”

When I think about just how hard it is for people to get themselves in these situations, it’s all very well for the Minister and some of his ilk to say, “Well, they shouldn’t be investing in property. They should be investing in shares.” These same mum and dad investors invest in property because they can see their investment. It’s not that they’re after super profits; it’s because they have an investment where they can see what it is. They’ve long seen through the booms and busts in the sharemarkets, and they don’t know enough about the companies, in many cases, to feel that their investment can be safe. They’ve lost money when they’ve lent into mortgage funds where they’d been offered high interest rates; they lost money in the global financial crisis; they lost money in mezzanine financing firms where they were being paid substantial amounts of interest; and they’ve lost a lot of confidence in many of the market solutions working for them.

I see nothing wrong with a mum and dad deciding that they are going to buy another property, and that they’re going to rent that property out, because it’s going to be their nest egg. I don’t see anything wrong, if one of them gets ill and they suddenly can’t work, or whatever—one of them can’t work—with them deciding that they need to sell that property. They haven’t set out to make squillions. They’ve set out to build an asset and also to provide housing for someone else. What happens when these mum and dad investors go out of the market is not only do they lose an investment but, actually, as a Government that should be concerned about housing people and making sure that there is enough houses, rental houses—rental houses—

💬 Hon Iain Lees-Galloway: It’s about thankfulness that we’ve finally got one.

Rental houses, Mr Lees-Galloway—rental houses. Why shouldn’t these people, these mum and dad investors, be a landlord if that’s what they want to be. Why shouldn’t they be that?

💬 Hon Member: Why not?

And why not? Why should they go into this now thinking, “Well, if something happens, if one of us has a heart attack, if one of us can’t invest any more, we’re going to end up having to pay, when we sell the property, tax on that.” Well, actually, if they went in with the purpose of making money, they won’t. Does this mean, for instance—I think it’s a genuine question; not all property goes up all the time. Anyone who’s had any experience—

💬 Dr Deborah Russell: In that case, you don’t pay tax on it.

And there’s the person from New Lynn, who’s got a view, and she’s often on Twitter with very strange views, but anyway. Often properties go up and down in value. Anyone who’s been through the 1990s, the 1980s, the 2000s will know that these are often seven-year cycles, or thereabouts. Just because a property has gone up in value doesn’t mean to say it won’t come down in value. A lot of that’s dependent on supply and demand. It’s also dependent on interest rates and other things.

So these mum and dad investors, if they have to sell their property within five years for some various reason and they take a loss, are they now going to be able to claim back against their tax the loss that they’ve made on that property? I’d love to hear the Minister on this. Is he now opening that up to them? Because, clearly, he’s decided that they’re all in a business. And should one, for instance, buy a property, a new property—new houses often don’t go up in value to the extent that some people might like. Many of them, after an entire subdivision, actually they start to drop in value, and that is actually the history of it all. It’s so good to see the Minister’s now seeking some advice from his officials. I think that’s an excellent thing. But I think he should’ve done that before he came to the Chamber to discuss it.

I think it’s one of those areas where people need to understand we could actually end up with a massive liability in tax if, in fact, properties start to go down in value. Everything I’ve heard from the Hon Phil Twyford is that he is not going to do anything except bring down values. That means a lot of people having to sell up quite early, and I think they’ll be quite legitimate in coming forward and saying, “Hang on, you’ve decided I’m in a business. I am. You can pay the difference.”

Thank you, Madam Chair, and that’s a very excellent question posed by my colleague Judith Collins that I’d be very keen to hear the Minister respond to: if we were going to insist upon a brightline test and property values fall, what happens?

This is a piece of legislation introduced by the previous Government which does a number of quite technical things that will help improve the experience of taxpayers, particularly business managers, who are trying to engage efficiently and effectively with the tax system. So there’s been a huge investment made particularly, and continuing to be a big investment made, in the technology platform which Inland Revenue works on, so that it will be easier and faster for people to do business and to get the information across in real time, so that there is less hassle in the way the tax is paid.

So we support all of that. What we don’t support is the Supplementary Order Paper that’s been introduced by the Minister extending the brightline test from two years to five years in the manner in which he’s done it, in the sense that, as we’ve said in the previous discussion, there hasn’t been the opportunity for the industry and the people of New Zealand and the Parliament to have some detailed thinking about the consequences of that to ensure that that is a sensible thing to do.

There are three sorts of areas that are of concern. One is potential overreach that it’ll capture not just speculators but also normal investors and people who have bought holiday homes, for example. A lot can happen in five years, and they are being treated as speculators. A lot of people might be shocked to find that somehow they are treated as speculators and will have to pay tax on a second home, a holiday home or a rental home, that they have bought, not in any sense just to milk capital gains but circumstances have changed.

So extending that out to five years will have an impact on behaviour and what impact that is is something that we’re not clear on. The officials have talked about the potential lock-in effect, which is the economic consequences of this. People will now make their decisions not around the most sensible thing for them and their family but they will make their decisions around tax—whether they sell; they’ll hold on to it for five years in order to avoid the tax and hold on to properties that it wouldn’t make sense for them to hold on to for any other economic reason. The consequence of that is the lowering of efficiency of our housing stock, which anybody who’s concerned about that right now will wonder why we would want to be doing that.

The third thing is we do need to be careful about the impact that it could have on rental properties. So I’m looking at the revised regulatory impact statement from the officials in relation to this, and they do make the point that the extension of the brightline test may reduce the supply of rental accommodation if tax discourages speculators from investing and investors from investing in the rental market. Well, for goodness’ sake, anybody who’s tried to get rental accommodation in this city, in Wellington, at the moment, or Auckland, or many parts around the country might be shocked to find that this Government right here, right now is bringing in a Supplementary Order Paper (SOP) to change legislation, which, their own officials tell them, may have the consequence of reducing the supply of rental accommodation. And that’s what we’re seeing here. Why on earth would they be doing that? The Minister might have an explanation. I’d be surprised if he does. But why would we be doing things that may reduce the supply of rental accommodation? It is not compulsory in this country to go out and provide rental accommodation for other people. Anybody who is a renter or who is a landlord and knows landlords will realise that there are a lot of expectations on landlords now.

There are all sorts of difficulties associated with renting. It’s not compulsory for the people who do it. They might just stop. Why would I deal with the hassle? As a result of that, the rental market is squeezed. There are fewer properties available, and we are seeing the market responding with higher prices in many cities around this country. So this bill—the Government’s officials are telling them that introducing the extension of the brightline test may reduce the supply of rental accommodation. That’s why we need to take more time to consider just why we are opposing this SOP.

Thank you very much, Madam Chair. There are two things I would like to say. First of all, it’s somewhat surprising that the former revenue Minister and the current revenue spokesperson don’t actually know the rules around the two-year brightline test, let alone the five-year brightline test. What I would say is that the rules aren’t changing at all. Under the two-year brightline test that was brought in by your Government, the losses were ring-fenced. That remains, and I’m sure the former Minister does know that. So, just to answer your question: no, they are ring-fenced, as they always were. In fact, this is the interesting thing about the brightline test. Nothing changes. The exemptions still exist. Everything is there, except under the two-year test.

I would say that the current revenue spokesperson, the Hon Paul Goldsmith, made a very, very good point. What he said is that, under this, people will take into account tax considerations when buying property. The problem we have, Mr Goldsmith, is that that is what they’re doing at the moment. People are saying, “I don’t have to pay a capital gains tax if I buy a house and hold it for after two years.” Therefore, they are making a decision based on tax implications, as opposed to, say, for example, a balanced portfolio.

What we want to do is say, “If you are buying a property, that’s all very well, and we’ll encourage that. That’s fantastic. However, if you flip that house within five years, you will have pay tax on the gains you make.” I think that is incredibly fair because with salary and wages, with shares—as the former Minister talked about—you pay tax on these. Why shouldn’t you pay tax on a house if you are not buying it for a rental yield but if you are just buying it for a capital gain?

The former Minister, the Hon Judith Collins, actually brought up a very good point. What she did say, and I’ll quote her, is, “The property market goes in cycles.” She said, “It normally goes in seven-year cycles.” And she is dead right. If you’ve held your property for over seven years—in fact, if you’ve held it for over five years—under this rule you’re not paying tax on that. So this is how this works.

So we are not after the people who were buying properties for rental yield, which is exactly the argument the former Minister made. So if you hold your property for seven years, if you hold it for 14 years, if you hold it for 21 years, and you go through those market fluctuations, you’re an investor; you’re not a speculator. This is differentiating between the investors who do hold their houses, who are after rental yield, who are after providing social houses, rental houses, for people in our communities; it’s not the speculators who are flipping houses and paying no tax.

The other point I would like to make, which the Hon Paul Goldsmith brought up, is about rental accommodation. The former Minister is right only under the assumption that the housing stock remains static. So if, in fact, we weren’t building any more houses and someone was buying a house as a first-home buyer, as opposed to a renter, then, in fact, what we have done is we’ve moved someone who was renting into a house. So they’re no longer renting. They own their own home, which is not a bad thing.

But what this Government is doing is actually building 100,000 more houses over 10 years. We are substantially increasing the level of housing stock in this country. So, again, I don’t think there is anything wrong in someone moving out of a rental because another couple, another family, another person has bought it to get into that housing market. We’ll encourage that. But, Mr Goldsmith, I just would like to say to you that this is not about punishing the ma and pa investors. This is not about punishing someone who has bought a house and is holding it as their retirement nest egg. By the very virtue of holding this for their retirement nest egg—I’m the first to admit I’ve done that myself. I bought some rental property six years ago—[Interruption] No, I’m an investor. I bought it for my retirement. It’s a nest egg. But I’ll tell you what. If I was a property trader, if anyone is a property trader—if they’re buying houses and they’re flipping them, if they’re a property speculator, not a trader, if they’re a speculator and they think they can get away with not paying tax, they can’t.

So I will go back to one of my original points. This is not about punishing anyone at all. This is about the integrity of our tax system. This is about saying, “If you are a speculator, as a society, as a community, we expect you to pay tax on your capital gains.”

Most parts of this bill, we think, are fantastic. That’s because the genesis of it came from the honourable members in front of me. It seeks to modernise the taxation system. I agree with the previous speaker Greg O’Connor, who said that nobody likes paying tax, and they don’t. But, actually, to run a nation you need to pay tax to fund the public good. We need to make sure that it’s more modern, and that’s actually the fundamental part of this piece of legislation. So I congratulate the Minister for bringing the bill forward and adopting the good work of the Hon Judith Collins and other people. [Interruption] Sorry, only you; my apologies for spreading the credit.

I also support the Business Transformation model, and sitting in the select committee there’s more work to be done, and I congratulate IRD for that. What we have to make sure, though, is that how we collect tax is done fairly. How we collect it needs to be fair to all parties in the taxation system, so everybody pays their share. We also need to make sure—and I think this bill goes a long way towards that—that we have on-time information for the Government of the day to be able to understand what’s happening to taxation revenues.

But I do want to come to the Supplementary Order Paper (SOP), and you might be surprised at this, Minister Nash.

💬 Andrew Bayly: Which one?

It’s the one that talks about the brightline test. I’ve talked about making things fair, and I actually think there will be some unintended consequences that may not have been thought out, which is why I supported a direction to give four weeks to the select committee. It hasn’t happened, and I accept that that’s democracy. But I do think there could be some unintended consequences for mum and dad investors.

If I look at the regulatory impact report, it talks about over-reach and it talks about lock-in. Actually, the significant concern that Treasury and IRD had was around over-reach. All of this is a balance. If you choose two years, you might not get quite enough people. If you go for five years, you run the risk of getting some of the wrong people. So that is a judgment call that’s made.

But, actually, I’m more concerned about the lock-in clause. The lock-in clause says that if people think that after two years and one day they can flick it, you now transfer that out to five years. So people make a conscious decision to hold on to investment and property for that time when, actually, for a whole lot of non-capital reasons it may make sense to them to release that property—and they’ll get caught. That actually does have an impact on the flow of sales of property and the economic market as it operates. That’s in this document.

The Hon Stuart Nash—I wonder if you’ve actually read the regulatory impact report. Some of it is actually counter to what you’ve just told us, and, on balance, you’re making a different direction. But I want you to reflect on the things that are being said in here, “The Treasury notes that the risks relating to over-reach and lock-in are unable to be quantified and therefore it is difficult to assess their significance in relation to the Government’s objectives”.

I come back to what I said previously. In the SOP, when it talks about targeting foreign owners—that’s what it says in the explanatory note, as to one of the things that it wishes to do. I think that’s an error. Actually, you’re going to target everybody. But if you read the SOP as written and the explanatory note, they talk about foreign investors. I think that something probably needs to be fixed.

But I come back to this point. There will be unintended consequences. If somebody has a family illness or a requirement for a restructuring for a whole lot of reasons, then, actually, they are caught—

I apologise for interrupting the member. The time has come for me to leave the Chair for the dinner break. The committee will resume at 7.30 p.m.

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

💬 LAWRENCE YULE: The issue I wish to bring is unintended consequences, and I’m pleased the Hon David Parker’s in the Chamber, because, actually, we found this in the Overseas Investment Act legislation as it’s gone through the select committee as well. What I worry about is some unintended consequences here.

I’m told, for instance, the Hon Stuart Nash, that Habitat for Humanity would be one of the entities that gets caught up in this brightline test. The very same group who are trying to help people get into homes and transfer them into proper homeownership will actually get caught in this test. It’s the type of unintended consequence that was the reason why we supported it going to the select committee for a month.

I think this is a fine balance between two and five years. We had it right as two years before. The taxation working party should be looking at this, and, in closing, I think this is another form of capital gains tax by stealth.

Thank you, Madam Chair. Look, I do want to take a call—at least a couple of calls—on Part 2 of this Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill. I had the opportunity earlier, in moving a procedural motion, to start to canvass some of my concerns. I took the opportunity in the debate on Part 1 to go through my views and my position on the bill more broadly, so I do want to focus my contribution in this call on the Minister’s Supplementary Order Paper (SOP) 13. Just for the sake of clarity, reconfirming that SOP 16 we see as largely technical and have no issue with, but SOP 13 is a significant change.

Now for those listening at home, a Supplementary Order Paper is something that is tabled in the House in front of us, often at the last minute. We’ve had this one for a little while—I acknowledge that’s the case, from the Minister. But it is intended to be something that corrects errors, adjusts drafting, and picks up little tidy-ups that haven’t been picked up through the course of the legislation. What it’s not intended to be is a significant change in the taxation settings that affect New Zealanders. There’s one thing I learnt very early in my study of legislation and the processes of this House, and that is that tax law, above everything else, must be very clear; very concise; if in doubt, in favour of the taxpayer; and really must go through the rigours of a proper select committee examination—a proper opportunity for the experts and those affected to feed into it

In fact, I’m fairly sure that I sat on the Finance and Expenditure Committee with the now Minister in our first term, when we had the opportunity to test a number of pieces of tax legislation. I’m sure he would agree that, actually, that select committee rigour creates a great deal of value in finding issues with legislation—irrespective of the political party differences around particular settings, but simply operational issues. My colleague Lawrence Yule, in the last moments of his contribution, talked about a very good example of that, which is the very real concern that’s been raised by Habitat for Humanity about the fact that the very nature of what they do in using sweat equity and volunteers and social capital to build those properties—their very model would be disrupted by this requirement that any transfer within a five-year period of taking the acquisition of the site would be caught and have an automatic capital gains tax imposed on it.

That, I think, goes to the heart of what it is the Government is seeking to achieve through this legislation, and what they’re actually achieving. The Minister will talk, I’m sure, from his perspective, but as I’ve understood the Government’s comments, the Government’s objective here is to try and help housing affordability. It’s a laudable goal—no one has any issue with the goal—but having a laudable goal doesn’t mean that everything you do in pursuit of it makes sense. I would seriously question whether this five-year brightline test is going to do anything for housing affordability.

In fact, the very regulatory impact statement that goes through and looks at the legislation and looks at this proposal says there is a lack of any clear data that tells us whether this will help housing affordability. So what we have is this knee-jerk reaction from the Government, desperate to be seen to do something, anything, just to have something to say that they’ve done, without any clear evidence that it makes a difference.

Let’s be a little bit more clinical about what they’ve said. They’ve said this is about helping housing affordability by attacking those nasty property speculators. Well, fair enough—but actually, there’s a couple of things to get very, very clear about. First of all, property speculation is already taxable under the Income Tax Act. So a property speculator—someone who buys property for the very purpose of selling it again and making a capital profit—is already subject to taxation.

When National was in Government, we brought in the two-year brightline test because we recognised, actually, that the balance of likelihood is that someone buying and selling a residential property within two years—more likely than not, they had bought it with the intention of selling it on and making a profit. So there is a natural alignment between likely outcomes and the period of time. You can’t simply extend it to five years and say the same holds true. A five-year window of transaction dealing is far more likely to catch property investors.

Now investors are a good thing, actually. We’re in a market where we need people to want to invest in the property market. We need people who are prepared to invest and grow housing stock. If we seriously want to make a difference—and I take the Government at their word that they do—about housing affordability, you don’t do it by constraining demand; you do it, Madam Chair—Madam Chair?

CHAIRPERSON (Hon Anne Tolley): Ah, beg your pardon. I call the Hon Amy Adams.

I got ahead of you, Madam Chair.

CHAIRPERSON (Hon Anne Tolley): There’s a lot happening here at the moment.

That’s all right, Madam Chair. I’ve got your back.

CHAIRPERSON (Hon Anne Tolley): Women can multitask.

That’s right. They do it not by constraining demand, not by stopping people wanting houses. You affect and impact positively home affordability, housing affordability, by increasing supply. So here we’ve got an attempt by the Government to stop people wanting to buy houses, to stop people wanting to own houses. Well, I would suggest that that is entirely the wrong approach. The right approach would be to say, “We want people to invest in the housing market. We want people to want to own properties and grow the housing stock.” What we need to do is increase the number of houses being built, not make it unattractive to hold them.

So here you have this knee-jerk, non - evidence-based approach to say, “Let’s just tax everyone who buys and sells a house within five years, whether or not they’re a genuine investor. We’ll call them all speculators, and somehow, we kind of hope, in the wash, that will help housing affordability.” Well, it won’t. It’s misguided; it hits exactly the wrong part of the market. If the Government had been big enough to be prepared to actually hear some open and honest debate about whether this was a good idea, we would have seen the SOP go to select committee and we would have seen discussion about it.

Interestingly enough, the Inland Revenue Department—who are not a department who are known for wanting to constrain their own powers and reach—have said themselves that they think a two-year brightline test is a better period. They are not in favour of extending it to five years. They’ve said that because of the very risk of overreach that I’ve talked about, where you actually risk taxing a whole lot of people undertaking legitimate and proper investment activity; two years is the better period. And yet, the Government doesn’t want to hear that—doesn’t want to hear from the actual people who will end up paying this tax, whether or not it’s a good idea; doesn’t want to wait for analysis of whether this will have any impact at all on home affordability. Nope, they want to chuck it in as an SOP—a total abuse, in my view, of the processes of this House—and not have it go to select committee.

I asked earlier this evening that we take a mere four weeks for the public to have a chance to have a say on this, for the practitioners to have a say on it, to test whether there are unintended consequences—and I have no doubt the Minister’s about to jump up and tell me that his officials have assured him not to worry, it’ll all be fine. Well, frankly, we shouldn’t have to rely on that. We should have the right to hear from the individuals themselves whether they’re affected, and from the tax practitioners themselves how they see it playing out. But instead, we’ve got a Government so desperate to be seen to do something that they will abuse the processes of this House, they will cut out the right for New Zealanders to have a say on a proposition that is opposed by the IRD as not being the better framework; that has not got any evidence that it will help affordability; that doesn’t address the core issue, which is about supply.

Actually, even worse, or certainly just as bad, what there is clear evidence of is that proposals like this have the opposite effect, because as you drive investors out of the property market, you get a reduction in the number of rental properties available, and as rental stock becomes unavailable and rental rates go up—and I know this as a previous Minister of Social Housing—it makes it that much harder for people to transition from social housing back into the rental market and then through, hopefully, in the long term, to homeownership. If you take out, or make unaffordable, that rental step by reducing supply, you’re making it harder for those in the housing market and you’re increasing the housing costs on real New Zealanders.

This is an SOP to this bill that is outrageous. It is a total abuse of the process of this House. It is being rushed through for no good reason—there is nothing that a four-week time frame would have hurt the Government. They don’t want to hear whether or not it’s a good idea; they just want to be able to point to it and say they’ve done it. The Government don’t appear to care whether it’ll make any difference at all, and, in fact, despite clear evidence that it will tax people who should not be taxed, it will push up rental pricing, and it will create inefficient use of the housing stock that we have, the Government is still intent on ramming it through.

For that reason, not only will National continue to oppose this capital gains tax by stealth, clearly designed to be an interim measure before Sir Michael Cullen and Grant Robertson manage to impose their full capital gains tax that they absolutely appear to want and have set up the Tax Working Group to deliver—we will oppose not only this SOP, but if this SOP is included in this tax bill, even though it is a bill that our Government put together, that our Ministers introduced, and that we would otherwise have supported, the nature of this SOP makes it so egregious that we will oppose it. We will oppose it strongly, and we’ll make it clear to the people of New Zealand what an abusive, arrogant process this is.

Thank you, Madam Chair. Thank you for taking my call. I thought I just might follow on a couple of little technical points from the Hon Amy Adams, particularly around Supplementary Order Paper (SOP) 13—as she’s been discussing, and as we have all canvassed tonight, this issue of bringing this substantial change into the House at a late stage without the opportunity for anyone to have the ability to consult on it. As I said earlier, I identified at least 10 parties who would be very keen to be making a submission on that because it will directly affect them. Also, the sheer fact that the select committee—the Finance and Expenditure Committee—hasn’t had the opportunity to debate this just raises the whole question around transparency and the willingness to operate in a proper manner. And I just lay it at the feet of the Government for taking this very disparaging approach to people’s interest in this topic.

So what I just wanted to do around this SOP is just note that, as many of you are aware, what the SOP, essentially, does is extends the brightline test from two years to five years. And, of course, it’s restricted to houses, and anyone who owns a house is subject to this rule. There are three exceptions. The first one is that the family home is exempt and you can only have one family home. So for people who live in different areas during the course of a week, they must nominate a family home. No tax will be required in the event of the dissolution of a marriage. And, thirdly, if there is a transfer as a result of an inheritance arrangement, then that is also outside the scope. But otherwise every piece of residential property comes under the scope of this bill. Of course, what this now does is that for anyone who owns a bach or owns a second home, whether it is for investment—the Government loves talking about speculators, but some people choose to invest in a second home—or, for instance, if parents want to invest in a home to provide for their children, then, theoretically, they’re captured under this new arrangement, which now places a five-year term before they can sell without the possibility of having to pay tax on that gain.

Of course, the question I did want to put to the Minister who’s in the chair, Stuart Nash, is at the moment—he talked earlier that there is a ring-fence around those gains, and there’s sort of this assumption, the expectation, and the Hon Judith Collins mentioned it earlier today, that there is always an increase in property over time and, of course, everyone is a successful speculator or investor. But, as my good colleague right beside me, Stuart Smith, is saying, that’s not right. And of course it’s not right—of course it’s not right.

So the technical question I just want to ask the Minister to comment on, when he gets an opportunity, is what happens with the loss offset when people buy property and they may have to sell it because their financial circumstances change—and the SOP doesn’t provide for that. So these are people who get into difficult situations, have to sell a property within five years, therefore, at that point, they may have to pay tax, but in the event that they have to sell that property at a loss, what happens to that ring-fenced tax loss. Now, is it available to be offset against other income—and as I understand it’s not. I can see the Minister looking behind just to get the right answer to this. But, if it is ring-fenced and can only be applied to future gains or losses on other property investment, does that loss basically sit in abeyance until that person—so the Minister looks like he’s nodding, which I think is an absolute travesty. It is an absolute travesty if that’s the case, because, if a person gets into a situation where they have to sell a house because their financial straits get them into that unfortunate circumstance, and they can only have that loss sitting there to one side and they cannot access that in the future, then I put it to you that I think many mum and dad investors round the—[Time expired]

Thank you very much, Madam Chair. I’d like to actually address a couple of the points that the two previous speakers have brought up. First of all, when Mr Bayly said that every single property in New Zealand is subject to this—

💬 Andrew Bayly: Residential property.

Residential property—residential property. Well, let me just tell the member, there’s about 1.7 million residential houses in this country. The two-year brightline applies to about 3,000 of those; we think that this will bring in about another 2,000 houses, so, in total, about 5,000 houses. That equates to about 0.03 percent of all residential properties. Of all residential properties in this country, 0.03 percent will come under the five-year brightline. So it’s only a small part—it’s only a very small part. And when that member, and certainly when Amy Adams, says that Labour views speculators, and I quote, as “nasty, horrible speculators”, that’s not the case at all. Speculators have a place in the housing market—of that there is absolutely no doubt. It’s a part of commerce—it has been for a long, long time.

All we are saying is, in fact, the intention test in the Income Tax Act, which will determine whether someone has to pay money on a capital gain they made versus not, just is not working, and we all recognise this fact. We all recognise this, and we think that the difference between speculation and investment is about five years. It could be four, it could be six, but it’s about five years. At the time when that Government introduced a two-year brightline tax—I do smile when Amy Adams talks about the fact that this is a nasty, nasty tax going after ma and pas; well, I do have to remind the member, it was actually the National Government that introduced this—we, Labour, said that it should be five years, because the two years, it wasn’t long enough. We debated this in the Finance and Expenditure Committee. Mr Bayly was on that select committee. We debated it. We got scenario analysis from Treasury and from IRD about whether we should do two and whether we should do five, and we came up with the conclusion that it should have been five years.

So this isn’t something we’ve just sprung on the people of New Zealand. We went to the election with it. We also debated it at select committee. So when the member says this hasn’t had a proper hearing from the people of Zealand, it actually has. And the member knows that, because he was sitting there. He read all the submissions, and I know he did, because he’s a very good member of select committee, and he is one of the few that actually does read everything that’s put in front of him. So he will have heard all those submissions. I’m confident of that. He will know the arguments that are put forward by the various lobby groups and interest groups and sector councils that he’s outlined.

One point I would like to make that Lawrence Yule and the Hon Amy Adams brought up was Habitat for Humanity. Now, I mean, I understand Lawrence Yule doing this, but I’m a little surprised that the Opposition finance spokesperson doesn’t quite understand the tax law here. Habitat for Humanity is a registered charity. Therefore, they won’t be paying tax under the brightline test. So you don’t have to worry about Habitat for Humanity; they’re fine.

💬 Hon David Parker: How could that mistake be made?

I don’t know how that mistake could be made. In fact, it was quite interesting, because, in terms of ring-fencing, the finance spokesperson for the Opposition didn’t know about ring-fencing, either. But, Mr Bayly, one thing I would say is that people who make a loss on this property—sure, it is ring-fenced, and those losses are held over in case they buy something else, but this is the interesting thing: when you go into an investment, it is not a fait accompli that you’re going to make a profit. That’s what profits and risks are all about. Sometimes you win, and, hopefully, if you are an investor, you win more than you lose, but sometimes you lose.

The Hon Judith Collins made the very good point earlier on that the property cycle is about a seven-year cycle. It goes up and down and up and down, and if you’re a shrewd investor or if you’re lucky or if you get it right, you’ll hit it going up. If you’re unlucky or you haven’t judged the market well, you’ll hit it going down. Now, that’s unfortunate—it really is—but the point we are making is if you ride out those cycles, if you do it for seven years or 14 years or 21 years, you’re not going to get caught out by this. It’s only if you buy a property with an expectation of making a capital gain, and you sell within the five years and you make a capital gain—we are going to tax that capital gain. We’re not going to take all the money you made. We’re only going to tax that capital gain. The way the Opposition is talking about this is that every single cent that you have made, the Government’s going to take. That’s actually not the case at all.

The other thing I would like to talk about, very briefly, is housing affordability. Now, for me, the number one thing for this brightline test is about the integrity of the tax system, and I fully believe that if someone is making money out of flipping houses, speculating on houses, they should pay tax. I think that is only fair. As I talked about earlier, and as the member is well aware, there is an intention test in the Income Tax Act at the moment, and the intention test is supposed to determine whether someone who is buying an investment property pays tax or not. How the intention test works is if you buy it for a capital gain, then you pay tax on the gain you make, but if you buy it for a rental yield, you don’t have to pay tax. It was so difficult to police this that we all thought there had to something done about it—all of us. So the then National Government brought in the two-year brightline test, in recognition that the Income Tax Act simply wasn’t delivering in the way that it needed to.

We agreed that the intention test simply wasn’t working. In fact, if you look at analytics at the moment—the Inland Revenue Department did some amazing work. The Inland Revenue Department get all the property information, so they know what is happening in terms of the market, who’s buying and selling. They had a look at a small sample, and what they found is that even in the two-year brightline test, 50 percent of people who should have paid tax did not pay tax. So the level of compliance, even after two years, was only at 50 percent, which I think all of us would agree is unacceptable.

I remember sitting around a committee table with the Governor of the Reserve Bank, and we were talking about Auckland property prices. He had showed us a graph on how they’d gone through the roof, and we asked him, “Are people buying these for rental yield? Are people buying these for a yield, or are they buying them for capital gain?” That was the then Governor of the Reserve Bank, not the current one, obviously—I don’t even know if he’s been appointed. He said, “No, no. They’re buying them for capital gain, because the rental yield on these properties was below the price you could get if you stuck your money in one of our trading banks.” So it was plainly obvious that people were buying these properties for speculation, to make a capital gain, and if that’s the case—if it is the case—then that person should be paying tax on the gain they make. But I’m the first to admit that if in fact they were buying it for rental yield, if they were buying that as a retirement nest egg, if this was part of their savings plan, that’s fantastic. They won’t be caught by this, because they will hold that property for longer than five years. So keep that in mind: if you hold the property for longer than five years, then you are not covered under the brightline test.

And we did talk about this. We did debate this long and hard. Mr Grant Robertson and I were also both on that select committee that heard all the submissions, and we heard everyone talk about the difference between speculation and investment, and when we were in Opposition we both came up with the conclusion that, in fact, the difference between investment and speculation is about five years. So one thing I would caution everyone on is saying, first of all, it’s about dirty, nasty speculators. I don’t view speculators as dirty, nasty people doing a rotten job. I view them as participating in the economy, but all I’m saying is if you’re speculating on houses, you should pay tax, and this is what this does.

In terms of housing affordability, for me that is secondary. The most important thing here is the integrity of the tax system. Now, in terms of driving people out of the rental market, or driving people who may buy an investment property out of the market, I don’t think that will happen, and the reason I say that is you pay tax on shares. That hasn’t driven people out of the sharemarket. If people still believe they can make a profit speculating on houses, then they will continue to do that. And this will be the real test: if people actually do move away from buying rental properties and flicking them, then we will know that the only reason they were buying these properties is for the tax advantage.

The member Andrew Bayly talked about the fact that we want people to do the right thing in terms of investment, and I’m exactly in that camp. We want people to do the right thing, but we absolutely believe that people were buying these houses for the tax advantage it gave them, not for the investment advantage—so not as part of a balanced portfolio, but for a tax advantage, and that is the wrong reason, and that’s the wrong signal we want to send. So this is really about taxing speculators, bringing them within the tax net, and maintaining the integrity of the tax system.

I move, That the question be now put.

Thank you, Madam Chair. First of all, I’d like to congratulate Minister Nash for standing up. There are a couple of things that he just said that I’d like to pick up on, and it would be very nice to hear his comment.

💬 Hon Stuart Nash: I’ll come back and comment.

Very good. The first thing is he said that this will only affect roughly 3,000 properties, or about 0.13 percent of all properties. So the question is, if you’re going to put this bill in, if those are actually the figures that you’re talking about, why on earth would you be putting this in? I think there’s a logic break in terms of what the Minister’s just said, and I think, actually, it’s because he’s incorrect about the number of houses his Supplementary Order Paper (SOP) 13 potentially affects.

Because if you look at the make-up of the market at the moment, of all the houses in New Zealand, roughly 40 percent are owned by mums and dads in New Zealand, who own those second houses quite legitimately and for a number of different reasons. I’ve talked about the people who have baches and things like that, or outright investors, but I will also refer to mums and dads who buy a property, often for their children to live in, or to at least support them into that house.

Under the rules at the moment, I’m not sure, if you have an investment in a second home where you’ve been providing support to offspring—whether, in fact, this is going to be captured by this Draconian bill. I think this is the issue that I’d like to hear back from the Minister on, because, first of all, I think he’s erred in his facts, because I think what he was in fact referring to was, of all the houses, potentially the small number that Treasury and officials have assessed may enter into the situation where they are sold under a speculation-type regime.

But there are many other houses that are bought and sold within five years for quite legitimate reasons. I think this brings me to the second point. Yes, of course, the National Government brought in the brightline test for two years, and we were very judicious about it, because, of course, we wanted to stop speculators flipping houses—to use the common parlance. That’s what the brightline has been very, very successful on and has been recognised by officials to be exceptionally successful on. What this SOP has done is extend it to five years. What I haven’t heard is any logic to that because we actually, unfortunately, haven’t had the ability to have an open conversation around it. Why take it from two years to five years? The implications of that are incredibly significant.

Going back to the example I said earlier, under the two-year brightline test, if you are a mum and dad and you get into financial difficulty, something—

CHAIRPERSON (Hon Anne Tolley): I hope I don’t.

No. Madam Chair, I hope not, and I know you wouldn’t.

But for those who get into financial difficulty, under a two-year time frame, that’s manageable. But under a five-year time frame, we have now entered a realm where the unintended consequences are quite significant. The issue with that is, as noted in the summary, the officials haven’t been able to assess the impact of this change. So, if you cannot assess the impact of this change, why on earth be proposing it with all the potential downside of the unintended consequences? These are the issues that we haven’t had discussed with us. What we’ve had during the election was a sort of a nice mantra about stopping speculation, with no one actually sitting down and doing the hard thinking behind this policy. It sounds great, but what it ultimately does is potentially effects many New Zealand people, who for the correct and honest reasons decide to buy a second property, who are now potentially going to be in a situation where they have to pay tax. I think that’s a travesty around that.

The last thing: I do not think the Minister has properly addressed the issue of the stranding or the abeyance of those tax losses for those unfortunate people who do have to sell their property. They will sit there in abeyance where no one can access them—only the people who are lucky enough to be able to get back into the property market, and to be able to access that, they’d have to get back in and re-trade property. All that does in incentivise people if they’ve got tax losses somewhere to at some point start trading again, which is actually counter-productive to the whole intent of this bill.

This bill and the SOP lack an incredible amount of logic.

I move, That the question be now put.

Motion agreed to.

The question was put that the following amendment in the name of the Hon Stuart Nash to Supplementary Order Paper 13 be agreed to:

in SOP No 13, in proposed new clause 28E(2), replace “.” with “receives the Royal assent.”.