All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

New Zealand: Government announces drastic residential property tax reform

Sponsored by sponsored-firms-russel-mcveagh.png
New Zealand government announce a housing package containing significant tax reforms

The New Zealand government has announced a housing package containing significant tax reforms. Fred Ward and Isabelle Collins of Russell McVeagh discuss the key policy measures.

In late March 2021 the New Zealand government announced a housing package containing significant tax reforms aiming to increase housing supply and remove incentives to curb so-called ‘rampant speculation’.  

The housing package contains two principal tax policy measures: 

  • A recently enacted extension to the residential bright-line test (which deems the proceeds of selling residential property (other than a person's main home) within a specified period to be taxable) from 5 to 10 years; and

  • A proposal to remove interest deductions for residential property investors.  

No more deductions for interest expenditure

By far the more controversial of the two measures is the proposal to remove interest deductions for residential property investors.

Currently a taxpayer can deduct the cost of interest expenditure incurred in the course of deriving income, for example, rental income.  

The government proposes to disallow interest deductions from October 1 2021 for all residential property acquired on or after March 27 2021. It will also disallow interest deductions for money borrowed after March 27 2021 to maintain or improve property, even if the property was acquired before March 27 2021.

For existing property investors with outstanding loans (i.e. for property bought and money borrowed before March 27 2021), interest deductions will be phased out by 25% each year for the next four years. From April 1 2025, none of the interest expense will be deductible.

The government has suggested that property developers, who would be expected to pay tax on the gains from the sale of their properties, will be able to continue to deduct interest expenditure.  

This measure is likely to impact considerably on the after-tax profit on rental income derived by residential property investors. It will not otherwise change the way that property is taxed (or not) when it is sold.

Significantly, the Treasury advised the government against proceeding with this proposal at this stage, due to “time constraints and lack of analysis”.  However, the government has announced it will consult on the detail of this proposal before introducing legislation in advance of the expected October 1 2021 implementation date.

Bright-line period doubled

The second key measure of the government's package is the extension of the residential bright-line test from five to 10 years. This measure came into force on March 27 2021.  

The bright-line test now requires income tax to be paid at a taxpayer's marginal tax rate on gains made from the sale of residential property within 10 years of its acquisition, subject to several exceptions. Among other exceptions, the bright-line test does not apply if the residential property is the taxpayer's ‘main home’ or if it was acquired by inheritance.

The new 10-year period applies to all residential property acquired on or after March 27 2021. If sold within 10 years of acquisition (provided no exclusion applies), the taxpayer will derive assessable income on the proceeds of sale.

The government also enacted measures designed to limit the way the ‘main home’ exclusion can be relied on by taxpayers. Previously, the exclusion applied if the property was used as a main home ‘for most of’ the bright-line period. The exclusion as amended now takes into account a period in which the main home criterion is not satisfied and, if that period exceeds a year, the bright-line period is effectively extended.  

Consistent with its aim to increase housing supply, the government has also proposed to provide preferential treatment to ‘new builds’, which will only be subject to a five-year bright-line period. However, it has not yet determined how a ‘new build’ will be defined, and such an exemption will be introduced to Parliament after further consultation. 

 

Fred Ward

Partner, Russell McVeagh

E: fred.ward@russellmcveagh.com


Isabelle Collins

Law clerk, Russell McVeagh

E: isabelle.collins@russellmcveagh.com

 

 

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree