Option Meets objective? Impacts Net impact Fiscal Economic Administrative Compliance Fairness 1 – Two year bright-line Meets objective (a) Largely meets objective (b) Partially meets objective (c) The 2 year is expected to raise an additional $5 million per annum, which is based on a number of behavioural assumptions, which are inherently difficult to quantify, such as the number of sales that would be delayed in order to exceed the holding period. The actual revenue collected under this option may be significantly more if the behavioural responses are different to those assumed. This option would create a “lock-in” effect as people have an incentive to hold property for longer than 2 years. This result in an economic distortion as people may not undergo otherwise efficient transactions due to the bright-line test. This option creates an easier to enforce rule which will decrease administration costs for Inland Revenue. Compliance costs will decrease for people currently taxed under existing rules as this option reduces ambiguity. Compliance costs will increase for other people caught by the bright-line as they have new tax obligations. The bright-line test will make enforcement easier and help ensure people pay their fair share of tax. May be seen as unfair as persons who sell within two years are treated differently from those who are able to delay their sale beyond two years. Ensures the key difficulty of enforcement where there is a high churn of properties is targeted while not capturing significant numbers of persons who had no intention of resale. 2 – Three or five year bright-line Best meets objective (a) Least meets objective (b) Partially meets objective (c) No estimate of revenue gain has been made, but we expect it would be greater than the $5 million estimated for option 1. This option would have similar lock-in effects to option 1. This option would have the greatest impact in reducing the administration costs involved in applying the “intention test” for Inland Revenue. Compliance costs would likely be greater than for option 1. This is because additional sales will be caught by the rules which are less likely to be taxable under the current rules. This option has similar fairness impacts as option 1. Provides easiest to enforce measure of the options. However, it is likely to capture significant numbers of persons who had no intention of resale.
Options Advantages Disadvantages Recommendations Apply to all land Removes difficult boundary questions in defining residential land Is not as well targeted towards main issue of high churn of residential property. The lock-in effect is greater as it affects businesses decisions whether to replace commercial property with more productive premises. Not recommended Apply to just residential land Focuses towards main issue of high churn of residential property No lock-in effect for commercial property lock-in effect is most distortionary Creates difficult questions for defining residential land Recommended Targeted towards main objective and minimises effect Main home exclusion One key design issue is whether the bright-line test should apply to a person’s main home. Options Advantages Disadvantages Recommendations Don’t exempt main home Greater revenue gains. Less exceptions from bright-line creates a clearer more objective test. Taxing gains on the main home is likely to have little public acceptability. Not recommended Exempt main home Greater public acceptability. Property is less likely to have been bought with an intention of resale if it is the seller’s main home. Less revenue gains, and bright-line becomes more subjective Recommended Consistent with existing rules Inherited and relationship property The current land sale rules provide special treatment for inherited property and relationship property. The analysis below considers whether special treatment should apply under the bright-line test for these transactions.