Following the somewhat surprising 2017 New Zealand general election outcome, there has been a plethora of headlines proclaiming that foreign buyers are now banned from owning property in New Zealand. Unsurprisingly, we have received a number of calls and emails as to what this actually means for foreigners who either have existing property or are contemplating purchasing property.
While we have not yet seen the detail, there have been some announcements setting out what is actually proposed.
Not really a ban…
The first point to note is that it appears that foreigners will not actually be banned from buying property in New Zealand. Rather, there is a proposal for all existing dwellings to be considered “sensitive land” under the Overseas Investment Act for any overseas person. Therefore, if a person is not a New Zealand citizen or if they don’t hold permanent residency status, then they will need to apply to the Overseas Investment Office (OIO) for consent to buy any such land.
However, we still need to understand which properties will be considered to have an “existing dwelling”. At this stage, the indication is that bare land will not be subject to these rules (unless already considered sensitive land), if the intention is to build a home on the land. However, it is unknown if there will be a requirement on when buildings must commence on bare land.
The other concern is whether it will only apply to transactions entered into after the legislation is introduced, or could it apply to property transactions already under contract.
What we do know is that there will be the inevitable cost when going through the OIO process. Further, like existing OIO applications, some evidence will likely be required to support that New Zealand is better off with that buyer owning that property, all of which could lead to additional delays that could make offers from overseas owners less attractive.
Some good news for those who come from Australia is that the new rules will not apply, due to reciprocal treatment for New Zealanders.
Capital gains tax
Another area of concern is around capital gains tax (CGT). The current indications are that CGT will only be looked at during this term of Government and any potential changes will only be campaigned on at the next election. We will have to see if this is the case.
What has been proposed with more certainty is an extension of the Bright-Line Rule that currently applies to tax on the sale of residential property, when sold within two years of acquisition. If applicable, any gain on the sale of such land is subject to taxation (unless exempted, such as if the property is the “main home” of the owner). The proposal is to extend this period, so that the sale of residential land within five years of acquisition would be subject to this rule. Given that 12% of residential property transactions have been caught by this rule, suggests that an extension to five years could have a major impact.
The application of whether this will apply to only future property purchases is unknown.
Timeframes
The new Government is pushing for these changes to be introduced into Parliament before Christmas. Given the lengthy stand-down period from December until February, legislation is unlikely to have effect until March.
What does this mean?
Right now, there isn’t a restriction on buying property in New Zealand, other than property that currently requires OIO approval. Therefore, until these changes are actually introduced, it is business as usual, with a caveat that these rules may apply to you. Therefore, we would recommend that you consult with experts on any property transaction, even before the changes are introduced.
As noted, there is still significant detail to come. We will keep you up to date with the changes as they are introduced. If you have any questions or concerns, we are here to help, so please contact your local adviser.