Brightline extension consequences

With the relentless upward pressure on house prices the government has signaled yet more change is coming to the property sector using the tax system to supposedly address the demand side of the residential property equation.

But given they have ruled out Capital Gains Tax and have already stripped away traditional deductions like depreciation it’s likely to be back to the future with an uninspiring increase in the Brightline as the front runner for change.

It seems a move to ten years Brightline from the current five will be the chosen lever as this would align with the existing ten-year hold rules in the taxing provisions that deal with developers, traders and builders “other land”.

But a move to ten years of Brightline is something the government really needs to think through if it seriously believes this would decrease investment buyer demand for residential investment property.

When National introduced the two-year Brightline it was simply to strengthen the “purchased with intention” rules that had proven unenforceable.

The subsequent move to five years Brightline by Labour has of course proven utterly ineffective as a measure to reduce demand and price for property.

A move to ten years Brightline, would, in my view, deliver the exact opposite of what the government is hoping to achieve.

For Brightline to work as a dampener to demand it would need to literally change buyers minds about investing in residential property. This may occur on the fringe but the vast majority of buyers contemplating residential property as a retirement investment will not be deterred by extending a Brightline. The near existence of a date in future after which no tax is payable ensures investors will cast their eyes forward to that date.

On the flip side, those who already hold property or do buy will think long and hard before bringing property to market that they otherwise would have. A ten-year Brightline is a very different beast than a two year one and will alter behaviours in ways the original Brightline was never designed to.

Consider some of the unintended consequences of extending Brightline. At present, there is no exemption from Brightline for transfers of property between associated parties. Helping children into property often involves parents using Trusts to hold property or parents going onto titles with their children in partnership to retain some control. Adult children now live fast paced lives and change is inevitable over a decade, selling or changing ownership of property like this acquired for family reasons will be highly problematic under an extended Brightline. No main home exemption exists for the homes lived in by a Trusts beneficiaries, escape is only offered to the Trusts principal settlers, the parents.

The bigger the gain and the closer an owner is to the end of the Brightline date the less likely they will be to bring a property to market before the Brightline ticks over. They will simply fold their arms and hold that property to avoid the tax a sale would trigger. If a property is not currently Brightline impacted there is still an increased reluctance to make any change if Brightline is then reset.

Real issues lie ahead for “unintended landlords” those that opt to retain a previous home as a rental and borrow for a new home to live it. Traditionally, a straight forward restructure was done to ensure appropriate structuring of such an arrangement was in place, but, if Brightline is extended further people will be forced to weigh up the perils of resetting Brightline against the benefits of making sensible structuring decisions.

All of this will add an element of paralysis by analysis to decisions that might have otherwise freed up property for sale or sensible restructure.

An extended Brightline therefore is likely to limit the future supply of property coming to market as owners simply hold assets because their assessment is that triggering tax on a sale gain is far worse than the consequence of simply holding onto a property they no longer need or want.

So much productive energy will be diverted to counting years and days and weighing up the consequences of selling as accountants grapple with alternatives that simple move people between rocks and hard places.

No doubt officials have warned this government that a Brightline extension and its unintended consequences could well and truly backfire if their goal is house price decrease but despite this, the desire to score cheap political points by making the lives of property investors more difficult by introducing measures that simply will not work and are easy rather than sensible seems to be the order of the day.

Measures that would actually create a genuine disincentive to buy rather than create a reason not to sell may prove far more effective than extending Brightline if the goal is to reduce demand. Australia has for many years imposed targeted stamp duties on property acquisition and done so very effectively, even ensuring foreign buyers pay more than Australians.

Stamp duties may also actually result in predictable government revenues that will never materialize from extending Brightline that could be used to reduce our Covid-19 deficit or actually build some of the affordable first homes that were promised but never delivered.

Whilst property investors would rally against stamp duties, the current plan to keep extending the same things that aren’t working and expecting a different result is utter madness.