I have a client who has been hit rather badly by the Bright-line Test. His profit on the property sale is over $200,000, on which he will have to pay tax. As he already has a reasonable income, this is going to push him well into the top tax bracket of 39%. In fact, he will pay tax on the majority of the property sale proceeds at 39%.
It cuts no ice that he has been forced into selling the property at this time, for family reasons. The rules around the Bright-line Test are deliberately simple, designed that way to minimise loopholes. In fact, there are no loopholes. You sell a property that was not your main residence within a certain time period (in this case, 5 years) and you pay tax on the proceeds. That’s it.
The rules are so bad that, in a case I had a few years ago, a property owner had a beach property but rented a house closer to work. The rental was considered her main residence, meaning that, even though she owned only one property, it was not deemed her main residence, and therefore, she had to pay tax on the sale. Madness.
You may have little sympathy with people in these situations, but not everyone sells a house to make a killing. I knew of a case where someone lost their job, was strapped for cash and decided to sell the rental to be able to live… but was hit with a large tax bill. There are no let-outs – he had to pay the tax, but it took a big chunk of the money he had left over. This is a government that does not encourage people to look out for themselves.
It would be fairer for there to be a specific flat tax rate that applies to profits on property sales. Let’s say 20%. This tax could be deducted by the lawyer at the time the sale goes through (which is supposed to be happening now, but often doesn’t) and then the vendor does not have to worry about it again. These sales are windfalls for the vendors, so they are windfalls for the government too. If this was the case, vendors might not work quite so hard to avoid the tax, but might just factor it into the sale. A 19% saving would make quite a difference.
At the last election, National promised to link tax brackets with inflation, to avoid the infamous ‘bracket creep’ that catches people constantly, making them pay proportionately more tax as their incomes increase. I hope they promise to do this again, because the whole ‘bracket creep’ situation has become ridiculous. The minimum wage of $20 per hour now gives a full-time worker $42,000 in income each year. True, that is not a large income, and is not even considered to be a ‘living wage’, which is currently $22.75, or $47,320 per annum. But the 30% tax rate kicks in at $48,001, so those being paid very slightly above the living wage will be hit harder because they will be paying 30% tax on some of their income. Madness again.
These income tax rates have not changed since 2010, except for the introduction of the 39% rate on incomes over $180,000. Even someone on $42,000 income in 2010 would have slipped into the 30% tax bracket by about 2017, assuming they received pay rises that merely kept up with inflation. And the difference is a large one. The tax rate goes from 17.5% to 30% once your income goes over $48,000. Further madness.
In 2010, $48,000 was probably considered a reasonable income, but not now – not if the minimum wage is $42,000 and the living wage is very slightly less than $48,000. It is subsistence level earnings.
Obviously, the government should do something about low income workers (rather than beneficiaries) and raise the threshold for the 30% tax rate to $60,000 or more. But they won’t. The loss to the government coffers would be enormous. It would affect all workers who earn over $48,000 pa, which is most people nowadays.
When the next election rolls around, I hope that National do identify the enormous damage that bracket creep is doing to low income workers, and resolve to change the situation. After all, with the rate at which minimum wages are being increased, it will only be 3 or 4 years before those on minimum wage are paying tax at 30% on part of their income… and if that is not absurd, then I don’t know what else could be.
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