Nash StuartHon STUART NASH (Minister of Revenue): 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.Hon STUART NASH: 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 3000 of those; we think that this will bring in about another 2000 houses so in total about 5000 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?Hon STUART NASH: 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."