Date posted: 13/05/2021 6 min read

Have your say on residential property tax changes

Significant changes to property taxation will soon be open for consultation, and the NZ Tax Team wants to hear from members.

In Brief

  • How should a “new build” be defined?
  • Should residential property investors who purchase “new builds” be able to access interest deductions?
  • Should people who are taxable on the sale of the property be able to deduct their interest expenses at the time of sale?

The New Zealand Government announced key changes to the taxation of residential investment property and CA ANZ is looking for feedback on three key areas to offer in the public consultation process.

The changes announced in March 2021 were:

  • The bright-line test for existing residential properties acquired on or after 27 March 2021 would be extended to 10 years.
  • Interest deductions for existing residential investment properties would be phased out over four years.
  • The test for deciding whether a property was your “main home” would be changed and a change of use rule would be introduced.
  • It has been proposed that “new builds” for residential investment would be subject to a five year bright-line test, rather than the 10-year test.

However, while the core changes were announced with certainty, public consultation will be undertaken shortly on three key areas. These changes are significant and the NZ Tax Team wants to hear from members before and during the official consultation period about which would produce the best outcomes for New Zealand.

‘New build’ definition

How should a “new build” be defined?

At face value this may sound like a simple question, but it may produce more questions than answers.

Inland Revenue’s fact sheet on the bright-line changes signals the intent to define a new build as including properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004.

Is this an appropriate definition? Is it fair? Would taxpayers be penalised for delays in receiving code of compliance that are outside of their control?

Should significant renovations or additions to existing properties, conversions from commercial to residential, relocations or remedial works be included under the scope of a “new build”? And if so what should the threshold be for works to qualify as a new build? 

Interest deductions for investors

Should residential property investors who purchase “new builds” be able to access interest deductions?

Consultation will cover the details of an exemption for new builds acquired as a residential investment property.

Should interest deductions continue to be available for “new builds”? And will this support an increase in New Zealand’s housing supply? How long should new builds be exempt from the denial of interest deductions? Five years, in line with the preferential bright line period? Ten years, in line with the overall bright line? Or longer – for what period?

If new builds are exempt for a longer period – or for the life of the property – should this exemption be transferable? Should interest deductions (subject to tracing) be allowed in full? How should this rule interact with the residential loss ring fencing rules?

Deductable interest expenses 

Should people who are taxable on the sale of the property, be able to deduct their interest expenses at the time of sale?

This question potentially provides a light at the end of the tunnel for residential property investors and others not covered by the main home exclusion but is incongruous with the Government’s announced plan to phase out interest deductions on loans for existing residential property investments.

If allowed, should these deductions be available in full? Should private homeowners caught by the bright line rules be able to deduct interest costs against sales proceeds of their residential properties?

We want your feedback 

When advocating on tax policy, the New Zealand Tax Team takes a “best public interest approach” – essentially what is best for New Zealand as a whole. We also consider whether a policy change or introduction is fair and efficient, and whether it encourages taxpayer trust and belief in the integrity of the tax system.

We’ve outlined above some possible questions to start the conversation around these three key areas for consultation. This is just an outline, and as well as answers, we’d welcome any other questions you may have.

CA ANZ also sees the possibility for these changes to have effects on other areas of property taxation, such as clearing the path for the removal of our residential property ring-fencing rules.

Send your thoughts and feedback to our team at [email protected].

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Rushed bright-line announcements create uncertainty for home owners and investorSummary:  The NZ Tax Team identifies aspects of the 10-year bright-line test and interest deductibility changes that require further consideration.

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