Changes to the property tax landscape

By Robyn Walker

Late last month the New Zealand Labour Government shocked property owners around the country with some major changes to the taxation of land – a bold move not often seen under MMP, potentially leaving some with a new found appreciation of the rumoured “handbrake” New Zealand First applied to the last Government, and some happy to finally see some action.

Much of the focus has been on the reaction to the announcement: the aggrieved landlords, the businesses worried that they may be next, the policy wonks upset about the lack of advice and consultation. However, subject to some finessing of the finer details, the proposals are said to be set in stone; and so rather than focusing on whether this is good or bad policy, in this article we focus on the actual proposals and some frequently asked questions.

The changes – put simply

• The bright-line test has been changed from 5 years to 10 years for property subject to a binding agreement dated on or after 27 March 2021. An exclusion applies for “new builds”, which will remain subject to a 5 year bright-line test.
• The application of the “main home exemption” from the bright-line test is modified.
• Laws have been changed to put short-stay accommodation in what are essentially “normal houses” on an equal tax footing to long-stay accommodation. Properties used for Airbnb, bookabach etc are brought within the definition of “dwelling” and therefore should be subject to the bright-line test and certain other rules applying to long-term accommodation.
• Interest deductions on residential property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense, but the interest deductions will be phased out from 1 October 2021. An exclusion from the new interest denial will apply for “new builds”.
• If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be immediately non-deductible rather than subject to the phase out rule.
• Property developers should not be affected by these changes and will still be able to claim interest as an expense.

What can be influenced?

The changes to the bright-line test have been put in legislation already, but the changes to interest deductibility has not. The government has indicated that it will undertake consultation on aspects of the rules. This is expected in late May, with legislation following shortly thereafter.
 

Frequently asked questions

I have just bought a property – how do I know what rules apply?

The key will be to establish whether a binding contract was entered into on or after 27 March 2021. This can include a contract which is subject to conditions (e.g. builders report, finance etc). If an offer was submitted before 23 March 2021 (the date of the announcements) which was unable to be withdrawn, that property will be treated as being acquired before 27 March 2021.

If a purchaser has made an offer but has an “or nominee” clause (i.e. it is not yet known who the intended legal owner will be), the date of the nomination will be the relevant date, even if the contract is entered into before 27 March 2021.

What is the change to the “main home exemption”?

Any residential property that has been used as the owner's main home for the entire time they owned it will continue to be completely exempt from any bright-line test.

For residential properties acquired on or after 27 March 2021, including new builds, there is now a 'change-of-use' rule. This will affect the way tax is calculated if the property was not used as the owner's main home for more than 12 months at a time within the applicable bright-line period. This rule taxes any gain on the property in proportion to the time it is not a main home. For example, if a property has been owned for 9 years which within that time has been rented out for 2 years, 2/9th of the gain on the property will be taxable.

What is a “new build”?

This is still to be consulted on. Intuitively it should be newly constructed buildings, but this may be defined in some way which connects to the date of completion of the building; i.e. when it received a code of compliance certificate. Consultation should also cover trickier issues, such as whether an extensive renovation can be a new build, and what happens when a house is demolished and replaced with a new one (meaning in total New Zealand’s housing stock hasn’t been increased in the process).

If I end up paying tax on a property, can I claim deductions then?

New Zealand taxes net income, so under our current tax framework if an amount is taxable income, you should normally be entitled to claim deductions for the cost of earning that income. If you acquired property with the intention of selling it, you’ll be taxable on the sale regardless of how long you owned it. You’ll be entitled to claim a deduction for the costs of acquiring and improving that property at the time it is sold. Anyone caught under the bright-line test will be able to claim a deduction for the cost of the property. Intuitively that should also include any interest costs, but this is still to be consulted on.

How are interest costs being treated?

For property acquired before 27 March 2021, the ability to deduct interest will be phased out over a four-year period, starting from 1 October 2021. Any “new borrowing” after 27 March 2021 will be immediately non-deductible.

Interest on borrowings which is not applied to residential property should remain fully deductible. For example, if a mortgage is taken out against a rental property but the money is used for another business (e.g. buying and running a food truck), then the interest will be deductible.

What is new borrowing?

This may be wider than you think, and still needs to be clarified. What we know is that:

• If a property was acquired before 27 March 2021, you can deduct the interest on the loan under the phased-out approach. This will include loans drawn down for such property if the property settles after 27 March 2021.
• If you incur additional debt (from drawing on the same loan or taking a new loan) on or after 27 March 2021, interest on that portion of the loan will not be able to be claimed as an expense from 1 October 2021 onwards. Anyone with a floating mortgage may need to keep a close eye on account balances.

For more information, contact your usual Deloitte advisor.