Date posted: 24/03/2021

Inadequate consultation on far-reaching NZ property tax changes

Elements of the New Zealand Government’s latest housing policy changes skip an essential component of maintaining a trusted, efficient tax system.

In brief

  • The housing package has limited opportunities for consultation
  • Major changes include extending the bright-line test from five to 10 years, adoption of a change in use rule and not allowing interest deductions for residential investment properties acquired on or after 27 March 2021
  • Newly built houses will be subject to a five year bright-line test

The Government's latest housing package designed to increase the supply of houses and remove incentives for property investors does not include sufficient consultation for such far-reaching changes, says Chartered Accountants Australia and New Zealand (CA ANZ).

"Inclusion of the tax changes to the bright-line test into an existing tax bill in its final stages before Parliament effectively precludes public consultation. There will be limited opportunities to consult on peripheral matters only," said John Cuthbertson FCA, NZ Tax Leader for CA ANZ.

Treasury also has expressed concerns about tight timelines and the lack of consultation with officials.

"The bright-line test has been repurposed by the latest extension to 10 years. The original two-year bright-line test was introduced to buttress the purpose/intention of disposal provisions and deal with people flipping properties. We now have a change of direction with long term residential investors in the cross hairs," Cuthbertson said.

"Ten years is a long time to hold property and peoples' circumstances can and will change. Going forward either a lot more property disposals will be caught by the new test or behaviours will evolve where investment property owners are able to hold property for longer periods achieving a lock in effect."

What's changing

The bright-line test is being extended from five to 10 years. The bright-line test means if you sell a residential property within the prescribed period of time, you will pay tax on any profit made on the property together with any other income that you earn in the income year. This will result in the additional income being taxed at your top applicable marginal income tax rate.

While there has been no shortage of speculation recently that the bright-line test would be extended to 10 years, many may have been surprised by the other big change in the Government's housing announcement.

Currently, residential property investors can deduct the interest on their property loans as an expense against the income from their properties.  This allows them to reduce their tax obligation.

Government has announced that from 1 October 2021 these interest deductions will not be allowed for residential investment properties acquired on or after 27 March 2021. Investors who already own residential investment properties will have their deductions phased out by 25% each year. Deductions will not be available for interest costs on extensions to existing property loans from 1 October.

From the 2026 and later income years no deductions will be allowed.

The rules relating to short-stay accommodation (such as airbnbs) where the owner does not live in the property are also being tightened to ensure these properties are subject to the bright-line rule.

It's worth noting that while Government considers its key property changes non-negotiable, details of the interest changes were not included in the supplementary order paper introduced on 23 March 2021.

These changes will be introduced later in the year following limited public consultation on whether interest deductions should still be permitted for new builds acquired as a residential investment property and whether people subject to tax on the sale of their property should be able to ultimately deduct their interest expense at the time of sale. What constitutes a "new build" will also be open to consultation.

What exclusions apply

The bright-line test will continue to exclude residential property that was your main home for the entire time you owned it, and properties that were inherited and were the owner's main home for the entire time it was owned.

Government is also introducing a change of use rule, which will affect the way tax is calculated where the property is not used as the owner's main home for more than 12 months at a time within the bright-line period. Broadly where there is a change of use and the property is disposed within the bright-line period, the property owner will be required to pay income tax on the portion of the gain not related to its use as the main home. This calculation will be a simple pro rata calculation.

A change of use will not be triggered if a property switches to or from being the owner's main home, provided that the period where it is used other than as the main home is less than 12 months. This in essence provides a "buffer" for home owners to cover delays in moving into a property, moving out temporarily to undertake renovations, or delays in selling a property where the owner has already bought and moved into another property

Property developers, who are already required to pay tax on the sale of the property, will continue to be able to claim interest deductions.

Keeping your dates straight

Since its introduction in 2015, this is now the second time the bright-line test has been extended. Here are the key dates:

Bright-line test

Property bought before 29 March 2018

Not subject to either the 5 or 10 year bright-line test

Property bought between 29 March 2018 and 27 March 2021

Subject to existing 5 year bright-line test

'New builds' acquired on or after 27 March 2021

Subject to 5 year bright-line test

Property acquired on or after 27 March 2021

Subject to the 10 year bright-line test and the new 'change-of-use' rule

Interest deductions

1 April 2020–31 March 2021

100% of interest can be claimed

1 April 2021–31 March 2022 (transitional year)

1 April 2021 to 30 September 2021 - 100% of interest can be claimed
1 October 2021 to 31 March 2022 - 75% of interest can be claimed

1 April 2022–31 March 2023

75% of interest can be claimed

1 April 2023–31 March 2024

50% of interest can be claimed

1 April 2024–31 March 2025

25% of interest can be claimed

From 1 April 2025 onwards

0% of interest can be claimed

The changes were announced at a media briefing at 9am on Tuesday 23 March, and the draft legislation was introduced by way of a supplementary order paper later in the day. At the time of writing the bright-line legislation has not received royal assent.

As supplementary order papers are typically introduced in the final stages of legislation going through Parliament, there is not an opportunity for stakeholders and the public to provided feedback.

The generic tax policy process (GTPP) allows groups such as Chartered Accountants ANZ, business and taxpayers to provide feedback throughout the policy drafting and legislative process, on how new or amended legislation would impact taxpayers and the business community. It is a valuable and essential component of maintaining a trusted, efficient tax system.

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