Article: Property Investment

Earthquake Rule Changes And  The Two-Year Tax with Frank NewmanEarthquake Rule Changes And The Two-Year Tax with Frank Newman

Earlier this month the Minister for Building and Housing, Nick Smith,  announced “a more refined approach” to dealing with the problem of earthquake prone buildings.

The current rules had come in for mounting criticism and just a few months ago Property Plus warned of the effects the regulations could have on provincial towns where a significant percentage of the CBD property is considered earthquake prone.

The key changes are:

• New Zealand is to be categorised into three seismic zones of risk from high to medium to low. High risk areas will need to be assessed within five years and strengthened within 15; medium risk areas assessed within 10 and strengthened within 25; and low risk areas assessed within 15 and strengthened within 35 years. This means low risk areas like Auckland, Oamaru, Northland and Dunedin which will have up to 50 years instead of 20 to bring their older buildings up to standard. There is however a BUT. If an earthquake prone building is undergoing a significant alteration or upgrade then earthquake strengthening must be done at the same time. If significant means anything that requires a building consent then the extended timeframe is meaningless given even any reasonable makeover would trigger the earthquake upgrade.

• The new policy will exclude farm buildings, retaining walls, fences, monuments, wharves, bridges, tunnels and storage tanks. It is estimated that this will reduce the number of problem buildings from 500,000 to 30,000!

• There will be a publicly available register and website listing all earthquake-prone buildings.

• Buildings said to be earthquake prone will be required to have a notice visible to the public stating they are an earthquake risk. Those notices will need to state the level of Building Code compliance, and coloured red if under 20% and orange if between 20% and 34%. The Minister said, “These notices and extra information will influence customers and tenants and as a result encourage building owners to strengthen buildings ahead of the maximum timeframe”.

While the exemptions are sensible, the proposed time extensions for medium and low risk areas are unlikely to offer a practical benefit. The stigma attached to buildings with a red or orange sticker will in effect condemn them with a dose of leprosy that is unlikely to attract long-term tenants at anywhere near market rents.

There also needs to be clarity about exactly what constitutes “a significant alteration”. There is every reason to believe local councils will have a conservative threshold lest the finger of blame gets pointed at them in the event of a disaster. In this respect the Parliamentary select committee considering the Bill needs to spell out very clearly and explicitly what a significant alteration means. That committee is expected to report back to Parliament in July.

Two-year tax rule
Core Logic has provided some interesting figures in response to the governments new to-year tax rule for property investors (see last week’s Property Plus).

“There is a definite difference in hold period between Auckland and the rest of the country though – almost a third of Auckland sales are held for less than 5 years…it’s quite clear there are signs of speculation in the Auckland market – when breaking the hold period into yearly buckets we see Auckland peak at less than 1 year while for the rest of the country it’s most likely properties are sold within 7-8 years. So the new measures from both the Reserve Bank and Government certainly seem like sensible approaches to try and address Auckland’s rapid growth, mostly driven by Investors.”

They estimate the tax collected could be in the order of $70m a year, although this is hard to quantify because it excludes deductible expenses like renovation costs and some will already be paying tax on the gains because they fall into the trader category.

It is also likely that property investors will avoid the tax by not selling within the two years or they will live in the property they intend to resell and attempt to argue the own-home exemption.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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