Date posted: 19/03/2024

Coalition tax changes: Progress on promises made?

With the introduction of an Amendment Paper to the current Multinational Tax Bill, the Coalition Government has addressed all but one of its key tax commitments.

In brief

  • Return to a two-year bright-line test
  • Phased reintroduction of interest deductibility for residential investment properties
  • Removal of tax depreciation deductions on commercial buildings

As we enter a new era of fiscal reform, the Coalition Government has begun to reshape New Zealand’s tax landscape. With the introduction on 14 March of an Amendment Paper to the current Multinational Tax Bill before Parliament, the government has addressed all but one of its key tax commitments (promises made to the electorate as modified by the respective coalition agreements).

Broadly these include:

  • Return to a two-year bright-line test
  • Phased reintroduction of interest deductibility for residential investment properties
  • Removal of tax depreciation deductions on commercial buildings
  • Retention of proposed trustee tax rate increase to 39% (with certain exclusions)

The one outstanding commitment – personal income tax relief via long overdue adjustment to the lower/mid income thresholds is to be addressed at the end of May through the Budget.

While governments like to tick off actions achieved in short order it is also important to ensure that appropriate consideration is given to how these high-level policies are implemented. Tax is all about the detail – taxpayers crave certainty and tax legislation should be understandable and easy to comply with. Administration and compliance costs matter. It is therefore important to ensure that speed, which by necessity reduces consultation, does not materially impact accuracy.

Notwithstanding that people may not necessarily agree with all the policies, the Government has been able to achieve an appropriate balance – with the draft legislation introduced to implement each policy item - the “how”. Is the legislation perfect? No (but a high bar in any event). Key recommendations by stakeholders have been considered and where appropriate included in the design of the draft legislation. There is still work to be done.

Two-year bright-line

Returning to a two-year bright-line test provides an opportunity to significantly simplify the rules, including related main home exclusion, more in line with its original policy intent to capture property speculators (Flippers). Thankfully this opportunity has been grasped.

The revised test focuses on property disposals on/after 1 July 2024 where disposal is within two years. The bright-line period is determined with reference to defined terms for bright-line start and end dates. Changing the focus of the test to reference a disposal date rather than acquisition is a significant simplification as all previous tests no longer need to be considered and can now be repealed.

The main home exclusion has also returned to a far simpler mechanism based on predominate use – where “the land has been used predominately, for most of the time the person owned the land” (i.e. greater than 50% by reference to both area of land and time of use). An exclusion for construction has been retained but no exclusion has been specifically provided for adverse events.

The requirement for apportionment, relevant to the 10-year test, is not needed in the context of a far shorter test, where the owner has the option of holding the property beyond the test period if they would otherwise fail the test. Obviously to be able to access the main home exclusion the taxpayer must have lived in the home at some point during the two-year period.

CA ANZ had recommended use of the original two-year test or similar with the main home exclusion modified for time of construction of the home and absence from the home due to adverse events.

Phased reintroduction of interest deductibility

The commentary to the Amendment Paper confirms the policy intent to phase back in the ability to claim interest deductions for residential investment properties. This would take part in two stages: with 80% of interest deductions allowed from 1 April 2024, increasing to 100% of interest deductions allowed from 1 April 2025 (both dates are inclusive and reference fixed dates, not income years).
More significantly, the commentary also confirms that the above “percentages will apply regardless of when residential property was acquired or lending drawn down.” That is, from 1 April 2024 an 80% interest deduction should be available for all residential investment property loans. This is not immediately clear from a cursory reading of the draft legislation and requires some perseverance.

A savings provision has been retained to allow a deduction for any interest denied where the property sale is caught under the bright-line test.

Removal of commercial building depreciation

CA ANZ did not support removal of commercial building depreciation as there is evidence that such buildings do depreciate. The removal of depreciation is a fiscal trade off. Both National and Labour went to the electorate with the stated intent to remove tax depreciation on commercial buildings - to help fund other (but different) tax policy initiatives.

The removal of commercial building depreciation will apply from the commencement of the 2024/25 income year – early balance taxpayers will already be impacted. Taxpayers and their Accountants will need to consider apportionment of commercial buildings in the year of acquisition to facilitate tax depreciation deductions for commercial build fit out separate to the building proper.

Allowance has been made for the reinstatement of embedded fitout of commercial buildings acquired in the 2011 income year or prior. No equivalent provision has been made for commercial buildings acquired during the 2021 to 2024 income years (when building depreciation was briefly reinstated) where fitout was not separately depreciated.

Overall there is plenty happening in tax at present which is either exciting or stressful depending on your perspective. Once understood most of the above measures should simplify compliance. Deferred tax accounting adjustments on the removal of tax depreciation deductions for commercial buildings is of course another matter.

While the Amendment Paper advances most of the coalition’s tax changes closer to delivery, it remains to be seen what the economic impact will be and whether compliance and administrative costs are reduced.