Bank of mum and dad caught by tax trap: National MP decries brightline test catch

Parents who lend offspring money to buy a house and take a partial ownership stake are being caught in a tax trap, according to a National MP and a tax expert.

Andrew Bayly, National’s revenue spokesperson and Robyn Walker, a Deloitte tax partner, have expressed concern about the brightline test which they say has unintended consequences.

Bayly said some people who had loaned their children money were being caught in the net and he doesn’t think that’s fair.

“If a parent goes 50/50 on a deposit with their child and then five years later the child buys out the parent’s share, not only does the parent have to pay a capital gains tax on the increase in value, but the child’s bright-line period resets to zero, and they would therefore have to hold on to the property for another 10 years, otherwise they will have to pay a capital gains tax when they sell it,” Bayly said.

“It has hit many Kiwis who aren’t speculators,” Bayly said.

Walker presented to a Select Committee on the issue which she says catches people out in odd ways.

“The rules should be expanded to allow the main home exemption to apply to wider circumstances,” she said.

She also cited the parent/child house-buying situation via the “bank of mum and dad”.

“There’s confusion about when it should apply. The main scenario is parents helping children. A parent helping a child to buy a house may take an ownership share. Circumstances might change like a bigger house being needed or children being born, so that house could be sold before the decade is up. If they sell that property within the 10 years, the parent who loaned the money will be taxed on the gain because they would be regarded as investors,” Walker said.

Inland Revenue said today that when a part share in a property is disposed of, that share could be subject to tax under the bright-line test.

“Where there is a change in proportions of ownership, as currently drafted, the rules would result in the bright-line clock resetting for both parties. This resetting of the clock is not the policy intent and we intend to advise that the legislation be amended to clarify this,” IR said.

“The policy intent is that the clock should reset only for the newly acquired share. For example, if the ownership went from 50:50 to 25:75, the intention is that the clock should reset only for the 25% share transferred,” it said today.

On March 23, Finance Minister Grant Robertson said property investors make up the biggest share of buyers in the market so it’s essential the Government takes steps to curb rampant speculation.

The brightline test would be extended from five to 10 years: “Extending National’s brightline test and removing interest deduction loopholes for investors will dampen speculative demand and tilt the balance towards first home buyers.

“The New Zealand housing market has become the least affordable in the OECD. Taking action is in everyone’s interests as continuing to allow unsustainable house price growth could lead to a negative hit to the whole economy,” Robertson said then.

“House price increases of the magnitude we have seen in recent months are not only harmful to affordability, they also present a risk to economic stability.

“Our plan also encourages investment in new builds. To support our goal of increasing supply, we will keep the brightline test for new build investment properties at the current five years.

“This will give Kiwis a better chance at purchasing their first family home. I want to stress that the bright-line test does not and will not apply to the family home,” Robertson said in the announcement along with other measures to curb the housing market.

A spokesperson for Robertson said today any questions about the brightline test were better addressed to Inland Revenue than to that office.

However, Inland Revenue has been reported last year as saying it could recommend an amendment to the brightline test on this issue.

Bayly said it was now 10 months since the Government announced the extension “but confusion still remains about how the changes will apply”.

Tax experts had warned of side-effects like forcing people to keep their existing home for 10 years and long-term supply issues which could potentially increase rents, he said.

How the test is calculated had also changed, he said.

“Previously it was an ‘all or nothing approach. If you lived in a property for more than half the time you owned it, then it was deemed to be your main home and the brightline test wouldn’t apply. Now, if you are move out of your principal home for more than 12 months within the 10-year period, then you will have to pay tax on the capital gain for the period that you didn’t live in it.

“This will affect people who have to relocate to another city for a year for their job and rent out their home, including teachers and the police, or those people who are posted overseas, such as defence personnel,” Bayly said.

“The brightline test comes into play every time the ownership structure of a property changes,” he said.

“This was introduced last March but it’s only now that people will be starting to realise they will be caught and have to pay the tax. As time goes on, people will find themselves more and more in the circumstances where they’ve triggered these rules,” Bayly said.

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