Property Tax Consultation Launched
By Robyn Walker
Following on from the surprise announcements on 23 March 2021 that there would be a material change to the taxation of residential properties, today the Government has released further detail about those proposals. This comes in the form of a 143 page Government Discussion Document; which is supplemented by a range of fact sheets, which break down the proposals into more digestible chunks:
- Changes to interest deductibility
- Who is affected by the interest deductibility changes?
- What type of properties are affected by changes to interest deductibility
- The treatment of new builds under the bright-line test and changes to interest deductibility
- The development exemption
- Should interest deductions be allowed when property is sold?
- Changes to the bright-line test
Refresher: What are the proposals?
- 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.
- 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 from 1 October 2021 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.
The overarching purpose of the changes are to help achieve the Government’s goals around housing affordability:
“The Government’s goal is to encourage more sustainable house prices, by dampening investor demand for existing housing stock to improve affordability for first-home buyers. … The proposal to exempt property development and new builds should help boost supply by channelling investment towards increasing housing stock and away from direct competition with first home buyers and owner-occupiers for existing housing stock.”
What the documents released today highlight is that there can be a high level of complexity when it comes to implementing something which may sound conceptually simple. In some cases the outcomes for taxpayers will be clear, but in others it’s not so clear cut. The Discussion Document seeks to identify some of the tricker scenarios and explain how the proposals could apply.
Some key parts of the document include:
- What property should be subject to the rules? Exclusions are provided for a range of scenarios where property is not negatively impacting on the ability of an owner-occupier to acquire a house, for example, land outside New Zealand, employee accommodation, farmland, care facilities, rest homes and retirement villages.
- Who should be subject to the rules? It’s proposed that all taxpayer types (e.g. individuals, companies, trusts, partnerships) will be in the rules, but when it comes to companies only “close companies” and “residential investment property rich” companies will be subject to the rules. The exclusion for non-close companies means that many listed companies which might own a few properties as an incidental part of their business don’t need to trace and allocate interest to a (comparatively) small asset. Ensuring “residential investment property rich” companies are still subject to the rules is to prevent an incentive for landlords to pool their properties in a single widely held vehicle in order to get deductions. A company will be residential investment property rich if 50% of assets (by value) are residential property.
- If a taxpayer has a mixture of property types, how do they figure out what relates to residential property versus non-residential property? It will be necessary for taxpayers to trace their funding arrangements to each purpose and allocate interest appropriately.
- If property developers can claim interest deductions still, who is a property developer? The Discussion Document works through this, however in many instances, the output for a property developer will be a “new build”, which interest is deductible against.
- So what is a new build? The Discussion Document is fairly generous in allowing more than what you might first anticipate. Renovating an existing property to turn it into more dwellings may count, as will an existing home which has been relocated to a new section, and consideration is being given to also including substantial renovations which take an existing uninhabitable building back up to standard to be lived in. All these scenarios arguably add to New Zealand’s housing stock.
- Given the extension of the bright-line test to ten years, it is also proposed to reform the rules to allow taxpayers to restructure their affairs without triggering the bright-line, provided there is no significant change to the overall economic ownership.
Submissions on the proposals are only open for a short period with submissions closing on 12 July. It’s therefore important for taxpayers to take the time now to understand how the proposals may impact and take the opportunity to have a say.