The newly-formed government in New Zealand has wasted no time unveiling its policy priorities, and among them are several tax-related changes. John Cuthbertson FCA, CA ANZ NZ Tax Leader, underscores the importance of addressing relevant tax technical issues stemming from these policy shifts. 

Government's 100-day plan

Prime Minister Christopher Luxon's announcement of the Coalition Government's 100-day plan, which kicked off on November 29, has garnered significant attention. This roadmap comprises 49 actions, with three of them carrying tax implications. These actions encompass the elimination of the Auckland Regional Fuel Tax, repealing the Clean Car Discount scheme, colloquially known as the 'Ute Tax,' and cancelling impending fuel tax hikes. 

Significant tax changes to come

The Coalition Government are also to follow through on the following tax changes signalled in their respective election campaigns: 

• Income tax thresholds: Low to middle income tax thresholds are to be increased from 1 July 2024 to address bracket creep, assisting the “squeezed middle”. The Government has however confirmed no ongoing commitment to income tax changes, including threshold adjustments, beyond those scheduled for 2024. 
• Return of bright-line to 2 years: The bright line test for residential property is signalled to return to 2 years from 1 July 2024. This shorter period provides opportunity to significantly simplify the relevant rules and income calculation.  
• Interest deductibility: Interest deductibility for residential investment property loans is to be restored over a 3-year period with a return to full deductibility in the 2025-26 income year. Both National and ACT parties campaigned on a return to full deductibility albeit over different timeframes. The policy change removes a distortion in the market and should assist investment in the residential housing sector.
• Removal of tax depreciation deductions on commercial buildings: To help "pay for” the intended changes to income tax thresholds and interest deductibility, tax depreciation deductions for commercial buildings are to be sacrificed. While not confirmed, we anticipate that depreciation deductions are likely to be removed from either 1 April 2024 or the commencement of the 2025 income year. 
• Foreign buyer tax – a notable exception: The proposed foreign buyer tax has been shelved as part of the agreement with New Zealand First.

Cuthbertson FCA outlines specific factors that will need to be considered when implementing the proposed tax changes.

Increase after tax pay

The proposed adjustment to tax thresholds part way through the 2025 income year will result in the need to adopt composite (blended) tax rates to calculate tax on taxable income for that year. Composite rates represent a blunt instrument as they assume that income is earned evenly throughout the income year. Consequential changes to provisional tax calculations will also need to be made to allow individuals to reduce their provisional tax payments.

Reduced bright-line test 

The Government’s plan to reduce the bright-line test from 10 to 2 years by July 2024 raises questions about the test's structure, complexity, and potential rollover relief rules. Considerations include:

• The choice between reverting to the original 2-year test or modifying the existing test by reducing the period
• Determining which main home test to use, taking into account complexities like safe harbors and apportionment requirements
• Simplifying the test to align with its original intent as a buttress for CB 6
  Assessing the applicability of rollover relief rules
• From a bright-line perspective, there may be no need to retain a 5-year new build test given that the maximum period will be reduced to 2 years (however, the definition of new build land may need to be retained in so far as it impacts the interest limitation rules)
• Examining implications for gradual land acquisitions over several years
• Any transitional rules, and 
• Ensuring the new test applies prospectively to property acquired on or after July 2022 (assuming the rules take effect from July 2024). 

CA ANZ recommends that the original 2-year/5-year test be used as the base with modification to the "predominant use" test to allow for the construction of a residence or enforced absence for natural disaster events. This would significantly simplify the test and bright line tax calculation and result in a reduced land holding period.

Restore interest deductibility for residential investment property loans

The following points should be considered when implementing this proposal: 

• What the phase in relates to (including whether it will apply to loans taken out on or after 27 March 2021, which currently have no allowable interest deduction, unless in respect of a new build)
• How the phase-in interacts with the existing new build exemption
• Continuing the new build exemption until 1 April 2026 when full interest deductibility is proposed to be restored, and
• Availability of denied interest deductions for sales subject to bright-line test.

Remove commercial building depreciation

The Government’s proposal to end depreciation for commercial buildings will be necessary to address:

• Amendments to provide for commercial building fit outs that have not been separately depreciated. When the 0% depreciation rate was introduced in 2011, provision was made for fit-out in a commercial building acquired before the 2011/12 income year which had not been separately depreciated (s DB 65). In 2020 depreciation deductions were reintroduced for commercial buildings and s DB 65 was repealed. To allow depreciation deductions for the fit-out to continue, the adjusted tax value of the building was amended
• Key definitions, e.g., 'commercial building,' 'building'; 'commercial fit-out' 
• Transitional rules/application date. Removal of commercial building tax depreciation from the commencement of the 2025 income year is likely to provide the simplest alternative for taxpayers to implement by way of change to tax fixed asset registers. A fixed application date of 1 April 2024 could also be adopted. The Government are likely to want to reduce depreciation deductions and increase tax revenue as soon as possible.

New Zealand's tax landscape is poised for significant change as the Coalition Government implements its tax plan (both within the first 100-days to 6 months in office). The signalled tax changes will impact individual taxpayers, property investors, businesses, and the overall economy.