We'd like to say a big thank you to Anthony McIlroy at Evolve Accounting for the expert advice he provided to support this article.
On March 23rd the Government announced proposed changes to the taxation of residential investment property. These changes introduced a more level playing field for property investors, with the intention to address housing affordability. Investors must now differentiate between tax treatments on existing residential property (“non-new build”) and newly developed housing (“new build”).
Since then, further updates were announced on September 28th to help clarify the details of these rules, as well as some exemptions to the proposed changes. In this blog, we’ll go over three key changes, the latest updates, and what they’ll mean for you as an investor.
1. Changes to the Bright-line Test
With the bright-line test in place, if you sell a residential property within a set time period after purchasing, you are required to pay capital gains tax on any profit made through the increasing value of the property. This period has been extended from 5 to 10 years for non-new build residential property acquired after the 27th of March 2021. If your property is considered as a new build, the existing 5 year timeframe remains in place.
2. Bright-line Test Main Home Exclusion
Previously, the main home was completely excluded from the bright-line test on an uncompromising basis. The upcoming changes would mean that the main home is excluded from the calculation of the bright-line test, except where the property gets rented for more than a 12 month period during ownership. Where this occurs and the property is sold within the 5 or 10 year timeframes (depending on whether it is a new home or existing property) then a proportionate bright-line tax calculation is required.
For example, if you own a property for 4 years, and it is rented for 1 year, this will require a quarter of the capital gain to be taxed under the bright-line test calculations.
3. Interest Limitations Changes
There are a number of scenarios where interest expenses as a tax claim against your rental income will be limited. Firstly, for non-new build property owned prior to March 27th 2021, the ability to claim interest deductions will diminish over the next four years at rates prescribed by Inland Revenue. Next, for non-new build property acquired after March 27th 2021, no interest can be claimed. Additionally, for a new build property acquired after March 27th 2021, interest can be claimed for twenty years following the date of issuance of its Code Compliance Certificate (CCC).
The September Updates
The announcement on the 28th of September provided more details around the key points of these proposed changes, but the law itself is yet to be approved and adopted. The new law is expected to be implemented from March 2022, and will be retrospectively applied.
The notable points of the September announcement were:
- There will be a 20 year time limit for interest deductions on new build property.
- The timeframes of what is classified as a new build property was more clearly defined — this is a property that obtained its CCC after the 27th of March 2020, and was purchased after the 27th of March 2021.
- There were some references to change of ownership from the 1st of April 2022 not affecting or triggering these tax rules. This is notable for the bright-line test where this was previously the case, which is a win, but the devil will be in the detail.
- There are exemptions to these rules — notably, property developments and land outside of NZ, Employee or Student accommodation, farm land, care facilities, retirement villages, emergency housing, commercial accommodation such as hotels, motels, hostels.
- These exemptions will not apply to short-stay accommodation provided in a residential dwelling, like a bach, or AirBnB.
What do the Bright-Line Test updates mean for investors?
The changes that were announced in March have undoubtedly affected the investor decision making process. It skews the investor towards new build development, as the Government planned, but this is not to say that non-new build property shouldn’t be considered. As always, property investment should be considered based on the numbers and variables — aspects such as the size of the land, the opportunity for redevelopment, or improvement should also be factored into the decision-making process. This invariably adds more rigour to the evaluation process of property investment than there once was.
If you’d like help navigating these changes and its impact on your borrowing, get in touch with the team today for expert advice around these latest updates. If you need an accountant or tax perspective please email Anthony McIlroy firstname.lastname@example.org, who we would like to thank for his input on this blog.
This article is purposely written in plain English for general understanding purposes, definitions and detail are the subject of specific tax advice to your situation and this article should not form a substitution for that advice.