In a swift move signaling its reformist zeal, New Zealand’s new government announced initial property tax changes in December.

These are not merely isolated adjustments, they represent a crucial component of the government’s broader strategy to deliver income tax relief for individuals in this year’s Budget. The spotlight falls on two pivotal decisions: the contraction of the bright-line test for residential properties to two years, effective from 1 July 2024, and the removal of depreciation deductions for commercial and industrial buildings starting from 1 April 2024 (or more likely the 2025 income year).

The proposed changes have yet to be brought before Parliament in draft legislation but have already been the focus for discussion and debate. CA ANZ has dissected the technical nuances the changes entail, particularly the complexities and considerations in implementing the revamped bright-line test and removal of commercial building tax depreciation.

Reduced bright-line test

The government’s decision to scale back the bright-line test from 10 to 2 years by July 2024 is a move that is as bold as it is complex. This reduction raises questions about the test's structure, complexity, and potential rollover relief rules.

Key considerations involve:

• 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 and more broadly to capture property speculation. The current 10-year test is viewed by many as a quasi-capital gains tax.
• Assessing the need to retain rollover relief rules given the backdrop of a significantly truncated land holding period.
• 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)
• Any transitional rules, and
• Ensuring the new test applies to all residential property disposed of after 1 July 2024.

CA ANZ recommends that the original 2-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.

Removal of commercial building depreciation deductions

The government plans to abolish tax depreciation deductions for commercial buildings from 1 April 2024. CA ANZ does not support this change in principle as there is now widespread recognition that commercial buildings depreciate in value over time. The intent to remove depreciation is more a reflection of pragmatism and fiscal constraints faced by the government – tax savings are required to fund the adjustment of individual marginal income tax rate income thresholds.

Implementing this change requires addressing several complex issues, including:

• 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. It would also be the fairest option, ensuring that all taxpayers are impacted equally regardless of their tax balance date. Early balance date taxpayers will already be in the rules however before amending legislation is introduced. 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.

The government has also committed to fully restoring interest deductibility for rental properties, with details of the phasing of this commitment to be the subject of an announcement this year.

As these tax reforms take shape, they are set to significantly impact a broad spectrum of stakeholders, including individual taxpayers, property investors, and businesses.