Bright Line Test is too little, too late

On 1 October, the Government’s Bright Line Test came in to force, despite the fact the legislation has yet to be passed into law. It is still being considered by the Finance and Expenditure Committee. When it is enacted, sometime before the end of the year, it will be retrospective.

This is National’s too-little-too-late attempt to curb rampant house price inflation in Auckland. There is already a theoretical law that if you buy a property with the intention of on-selling it for a profit you are a “speculator”, and you are subject to tax. However, the intention test, as one might imagine, has been impossible to enforce. Who is going to declare their intention to on-sell a property if it means they will have to pay tax on the profit?

The Bright Line Test is meant to buttress the intention test, along with a requirement for overseas buyers and investors to give a tax identification number or IRD number in another recently enacted piece of legislation. It says if you buy and sell an investment property (i.e. not your main home) within two years, you are by default subject to income tax on the profits from the sale.

Auckland, New Zealand, where house prices have risen 20 percent in the last year alone
Auckland, New Zealand, where house prices have risen 20 percent in the last year alone

Given the increasing evidence of a housing market being driven up by speculation, National finally had to do something. The Reserve Bank of New Zealand, along with bank economists and the Treasury, had been calling for reform of the tax treatment of property to reduce speculation for years now – to no avail.

A capital gains tax (CGT), while a reasonable and common tax that exists in virtually every other OECD country, has not been seen as politically palatable in New Zealand because some people have bought investment properties with the intention of using the capital gains to supplement their retirement income.

So National, ever anti-tax, has never had the courage to campaign on a policy that would objectively be good for the economy as a whole.

A CGT would close the tax-loophole on property, which would help reduce speculation and the incentive to invest in a non-productive sector of the economy. It would also begin to broaden the Government’s revenue base and go some way to reducing wealth inequality. (It’s possible there are theoretical tax solutions that are even better than a CGT, such as a comprehensive capital income tax or a land tax, and I am certainly open to exploring those.)

However, the Bright Line Test will not be a proper CGT. It only applies to investment properties bought and sold within two years, although the official advice from Treasury originally recommended five years and certainly the majority of OECD countries with similar holding period tests are at least five years.

Source: Michelle Harding (2013), Taxation of Dividend, Interest, and Capital Gain Income, OECD Taxation Working Papers, No. 19, OECD Publishing, p33. Retrieved from: http://dx.doi.org/10.1787/5k3wh96w246k-en
Source: Michelle Harding (2013), Taxation of Dividend, Interest, and Capital Gain Income, OECD Taxation Working Papers, No. 19, OECD Publishing, p33. Retrieved from: http://dx.doi.org/10.1787/5k3wh96w246k-en

The two year period is too easy to game because it is too short. Smart speculators will simply hold on to the title until just after the two year date has passed. Five years would be an improvement, but why have a threshold at all? If someone is making a profit from purchasing and selling property, why shouldn’t they pay tax on that income – just like all the teachers, nurses, engineers, and retail workers who pay tax on their income? It’s bizarre that people should argue they would be unfairly disadvantaged by having to pay tax on income earned from property. The tax is nowhere near 100%, so by definition, those taxed will still be making money on the sale of their properties.

Another problem with the bill as drafted is that it only applies to “residential” land. The legislation has to go to some lengths to try and define exactly what is and isn’t residential land. The principles of sound law-making and tax policy include simplicity, coherence and comprehensiveness. Making exemptions for non-residential land introduces added complexity and an effective loophole, which could have unintended consequences. The intention test for speculation applies to all land, so why should the Bright Line Test that buttresses that rule only apply to residential? If there is not a problem with farmland or commercial land speculation, then there is no cost to including it in the Bright Line test.

The saga of this Bright Line Test legislation shows the difficulty of making good policy in a political environment. A number of individuals perceive themselves to better off without a capital gains tax, because it means more tax-free income for them. That doesn’t mean the policy isn’t better overall for the economy and society. We need a Government that has the courage to make sound policy that will benefit all New Zealanders in the long run.

National failed to implement a CGT when the Treasury called for it in 2010, and the Auckland housing market has continued to rise at a steeper rate in the past few years. This is not only bad for those who would like to buy a home in Auckland but have been priced out of the market, it also threatens the economic and financial stability of the whole country because we have so much leveraged debt.

What about the supply issue – isn’t that the whole problem according to National? There may be a bit of a supply issue, but nearly half of all house sales in Auckland over the past few months have been to investors, while only 12% were to first-time home-buyers. Meanwhile, rent inflation has been substantially lower than house price inflation, which suggests supply is not the only, nor the main factor.

We would like the Government facilitate the increase the supply of dwellings where land values are highest – the isthmus inner suburbs – so we could have more medium density housing options near good public transit routes and within walking and cycling distances of schools and jobs. They could help this through a National Policy Statement on urban development that gets rid of harmful planning restrictions in the proposed Unitary Plan. Most important, the Government should be directly increasing the supply of state housing in Auckland – not hawking off state houses.

Affordable houses provided by the New Zealand Housing Foundation
Affordable houses provided by the New Zealand Housing Foundation

In summary, the Bright Line test is poor legislation that has been rushed through the Parliamentary process and will be retrospective when implemented. The poor process means the law will not be as good as it could be, and the entire policy stance is insufficient and years (if not decades) too late to deal with the overheated market in Auckland. National is also failing to take any meaningful action to increase the availability of warm, dry, affordable homes near good public transport, where we actually need them.

The economy as a whole is paying the price for National’s lack of action, as the Reserve Bank has kept our interest rates higher for much longer than they otherwise would have been. If it hadn’t been worried about pouring fuel on the Auckland housing market fire, the Reserve Bank could have cut interest rates ages ago to spur investment in the productive economy.

We can do so much better than this. Germany has managed to achieve affordable housing even as the economy has performed well, and they’ve reduced climate pollution to boot. A centre-right coalition government there is implementing policy that is closer to Green policy here in New Zealand. This proves not only that it can be done, but that it’s better for people, the planet, and the economy.

11 Comments Posted

  1. First make sure of the grounding levels. If the use of the welder alters the ground locally, and it well can do so, you wind up with troubles. Ground isolation is the first step.

    Yes, relying on ground integrity (at the small signal level) in a factory is a very unreliable approach. I learned this the hard way in my one and only factory data experience in the 1980s, and that was just a printing works, lots of big kit, but nothing as evil as welding equipment.

    I’d certainly recommend the use of opto-isolators, [Black Box] have been doing these for as long as I can remember, and [B&B Electronics] also do good kit. Induction and capacitance coupling to cables can be significantly helped by using flexible armoured conduit around the cable, but it must be earthed at one end only, or it may make matters worse.

    If you’re handy with a soldering iron, a RS232 opto-isolator easy enough to design and build, even on veroboard or stripboard. Even easier if one grabs a couple of those single board RS232 to TTL converters with on-board dual voltage supplies to convert from single supply 5V, these cost just a few of bucks from Ali. Of course, a custom PCB design is nicer, if not cheaper.

  2. I’m the guy the EE’s fear the most, a SW Engineer with a screwdriver 😉

    Also with a degree in Mech Eng (could likely program your CNC’s ) and plenty of practical experience with a wide variety of chipsets and protocols.

    Serial is signal over the local ground, and that local ground isn’t always reliable, though from what you say it really is induced voltages and optical is the best option.

    There are some really nice USB O-scopes out there. I’ve never had an excuse to get one (not what I do these days), but you’re right about the dearth of practical EE types. Technicians like that are always in demand, never enough of them.

  3. BJ,

    Having successfully derail the conversation. Yes it is serial. Going to explore all those options. Have a work around in that we simply pull the RS232 plug from the CNC machines when the welder is being used. Makes drip feed impossible but we can run the smaller loadable program’s to a max of 15000 lines of code. Have no problems (touch wood) with the line being left in the computers. I like the thought of the optical link line.

    Wondered why we had a rash of broken tooling bits. The welder interfered with the spindle speed control meaning the mill was feeding but not cutting. All solved by simply unplugging the RS232 line. Learned that the cabinet housing the electronics is by design a farraday cage. Thinking of actually putting the computer (without its case) inside the cabinet and running leads out for the monitor, keyboard, mouse and wifi. That way there is no interference. Just have to engineer the leads out to not impinge the cabinets integrity.

    One thing I have discovered how few “hands on” electrical engineers are in New Zealand. Most seem to want to simply replace a motherboard (at around $2000 a pop) to “fix” a problem when all is need is for two $5 chips to be replaced. Asking one to drag an oscilloscope around is met with blank stares.

    Luckily we have many CNC forums on the internet to share problems and offer solution with fellow engineers.

  4. serial ?

    Couple of things then.

    You want the ground level for the two devices held common. This is critical for 232. Better to run a differential connection. 422 or 485 makes for a more reliable connection.

    Conduit for it? Aluminium or copper pipe grounded well is probably more potent than shielded cable.

    What’s the baud rate you’re trying to get? Slower may cause other problems but reliability goes up.

    I’ve used 485 in some fairly wild and wooly places, and are you sure the welder isn’t whacking the computers at either end? More specs and details, would help.

    First make sure of the grounding levels. If the use of the welder alters the ground locally, and it well can do so, you wind up with troubles. Ground isolation is the first step.

    Finally, if this is really kicking, get yourself another tiny computer. Just the littlest thing in an insulated box that you can set up on the CNC side. Now you can have a really really short connection (basically plugging the box into the comms link of the CNC) and you can use an optical link to your command and control.

    Might even manage it with some IR modulators and a length of pipe – I imagine the welder also emits IR 🙂

    Good little job for a kid trying to become an EE that, but you may want to actually buy a converter. They exist.

    ciao
    BJ

  5. BJ,

    Add to this blogs awkwardness the fact that the comments one writes are at the bottom of the page, not the top. Keep needing to scroll up to see what you said.

    You are missing two big point of difference between Germany and New Zealand.

    One – Germany through historical events has mostly state ownership of land. It is easy to set precedents (such as the timely release of land for residential use) if you own the property.

    In New Zealand most land is in private hands (including Maori land) and as such the state is much less powerful to control the supply or it’s utilisation.

    Sure you can force all sorts of rating systems to force the people to conform with the wishes of the state. Ain’t going to win many votes.

    Two – The German state actively encourages investors and discourages private ownership.

    Anyway have to go, pity you are not an industrial computer hardware engineer. Battling radio frequency interference from a big as welder with the RS232 feed from computers to CNC machines. Getting good at swapping out motherboard chips. Insulated cables are no match for the RF waves the welder puts out.

  6. Oh yeah… and you are right about this site. The inability to either edit or preview is just plain wrong.

    🙂

  7. OK Gerrit

    First, Julie said “We would like the Government facilitate the increase the supply of dwellings where land values are highest – the isthmus inner suburbs” which is basically saying that the housing density is wrong there. Which is true. Zoning for multi-occupancy dwellings and higher density would be a good start.

    Subsequently she said “Most important, the Government should be directly increasing the supply of state housing in Auckland – not hawking off state houses.” which is also true… but it isn’t exactly the same as the first bit.

    So we come to your version the Julie Genter argument for greater state housing in the inner suburbs and I just don’t read her piece and get your interpretation. She’s right in what she said, but you have created a rather different version. No.

    So how to force existing owners to bowl their 1940’s mansions and put up terraced or high rise state housing is pretty moot. ( moot, not mute, dumb tricksy language ) Actually not hard to make that happen at all. Just zone it right and the new buyers will value it in terms of multi-tenancy rebuilds that have hefty rental returns.

    Uninsulated 1 and 2 story houses sitting on the most valuable land in the country is dumb… and a good argument that nobody in NZ should actually own land… but that’s another argument.

    The CGT argument is dead and buried after the Labour party made such a hash of their CGT introductory policy at the last election.

    I think not. I think that it will return and with a vengeance in the next round. The incompetence of Labour is only part of the problem. The incompetence of the media in reporting the issues is a larger issue… and that is not going to prevail forever either. The issues will only grow worse and more damaging to the bulk of the population until there arises such a revolution as cannot be denied or forestalled by the liars. Yes, I heard Brownlee on the radio this morning.

    A bit of the German…

    ” In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third.”

    That sort of direct intervention in the market would effectively be a thermonuclear bomb for the Auckland house market. The “free market” solution has failed miserably and utterly in terms of housing and that has to be understood… it has failed more thoroughly the more thoroughly it has been applied (and allowing foreigners into the market causes it to fail faster and more completely).

    There is of course the “supply” side of the story – German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. and that is difficult in Auckland in terms of the Auckland story, but a similar effect can (*as observed above*) be had by altering the zoning in areas of the city, allowing multi-occupancy dwellings in more and more of it.

    To cap it all, ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

    There is already a serious “tax” on the ownership of the home here. We call it “rates”, rather than a consumption tax, and the landlord gets to deduct it while the owner has to pay it directly. Effectively? it works out as a 13th mortgage payment every year. Simply on the ownership not on purchase or sale. We reward landlords excessively, and actual productive investment or work pays a higher tax to replace that lost revenue.

    No Gerrit. Julie has the right of this. I remember looking for a house, and the real-estate agent’s astonishment that I actually planned to LIVE in the thing when the best and most financially advantageous thing to do was to be a landlord. Even if I was renting from someone else all the while.

    I am not a f***ing landlord! I am a Software Engineer. An economic system skewed so violently and desperately as ours is to advantage landlords, almost demanding we become landlords, is a matter at this point, of criminal negligence. It isn’t just this government either. I remember my letters to Labour and the results of those. I am not impressed by the comprehension of New Zealanders at this point. Hickey understands some. Greens understand a bit better… but this government and their labour counterparts are utterly incompetent players, enabled by an incompetent media.

    Capital Gains, Land, Income, Carbon- there is only one tax that this government was willing to raise, and that was the most regressive possible, the GST. That has to be hammered into the heads of the people of New Zealand… eventually they will get the point. Ownership doesn’t produce a single f***ing thing. It does no work and it should earn no money.

  8. Gerrit – I see you want to stay on-topic – oh… alright… 🙂

    I read exactly the first line. I am PO’d about the TPP and the foreign investor clause it contains. That guarantees New Zealanders will be second class citizens in their own country fairly soon.

    I’ll read the post now… try to work out what you’re on about and then respond. 🙂

    ciao

  9. Be nice if we could edit posts after publishing to correct mistakes made by large fingers on small keyboards. blockquote end tag did not work after …. availability of rental properties. Sorry

  10. BJ,
    You used to argue from a position of logic and reason but lately all we get is rants. Still if rants get the black dog of your chest, go for it.

    Returning to the Julie Genter argument for greater state housing in the inner suburbs. If the government owned the land, sure they could build more housing there. But they dont. So how to force existing owners to bowl their 1940’s mansions and put up terraced or high rise state housing is pretty mute. Ain’t going to happen (and the Auckland Council has now places a historic building covenant over ALL pre 1940’s buildings) .

    The CGT argument is dead and buried after the Labour party made such a hash of their CGT introductory policy at the last election.

    I doubt if any NZL’er will vote for a CGT after the Greens political spouse mucked that up good. Especially as inflation was not to be a factor in setting the value of the capital gain, nor that any improvement cost could be deducted from the capital gain made. Oh, forgot to mention the months grace to sell the property after Granny died portion of the proposed tax, killed it stone dead.

    Found this interesting in the linked article regarding German housing.

    The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

    Do I detect a conflict here? The Germans strengthen the tenant – landlord relationship (something NZL needs to do) but they discourage personal ownership of real estate property.

    To cap it all, ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

    Completely different story then the one Julie Genter is portraying (investors evil – first home buyers shining saints). The German state is not in the landlord market. They actively encourage PRIVATE investors (but discourage land banking).

    Did Julie Genter (and did you BJ?) actually read the article she linked to or is she as guilty of sham political point scoring like James Shaw and Gareth Hughes?

    Come on Greens, get your act together.

  11. I see that National, in its eagerness to allow and its greed for more foreign speculation investment, has agreed in the TPP to force future governments to accept the practice of selling NZ to foreigners. Apart from being a blatant abrogation of the Treaty, it embraces those same principles of National that have been driving NZ to become a Banana Republic, albeit with Milk rather than Bananas.

    Utter fail. Prices are set at the margin and the foreign money that is buying NZ houses is not as welcome to me as it is to the Pimp Minister..

    — Too little too late exactly. National has no actual interest in reining in the prices in Auckland. Heck, it adds to the Gross Distorted Product. The owners are, more and more, the beneficiaries of National’s policies and are, more and more, not even New Zealanders.

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