Accounting and Tax

Controversial Tax Changes for Residential Property

Daniel Gibbons Daniel Gibbons
30 March 2021
9 min read

30 March 2021

On 23 March 2021, the Government announced their Housing Plan which included some significant changes to how residential properties will be taxed in New Zealand.

The most significant of changes was the doubling of the Bright-line Test effective timeframe from five to ten years. This impacts residential properties acquired on or after 27 March 2021, where such properties are not the “main home” of the owner (i.e. Investment properties and holiday homes).

In addition, the Government announced the deductibility of interest from loans relating to the acquisition of rental properties will be removed. This takes effect from 1 October 2021 for properties acquired from 27 March 2021 and will progressively apply to all other relevant properties from the 2022 tax year on a scaled basis, phasing out 100% of interest costs by 2025.

Bright-line Test

The Bright-line Test was first introduced in October 2015 as an additional measure to tax property speculation. While rules existed to capture such property speculation, the Government argued it was proving too difficult to effectively apply them given the nature of how the rules were applied and policed.

The Bright-line Test’s key feature is that it removed intent from the equation. Instead, it focused on whether the property was sold within two years (the bright-line period at the time the rule was released) and its use.

The use was important, because any property predominantly used as a main home was exempted. Residential land that was considered farmland or a business premises was also excluded.

However, while the bright-line test was intended to capture speculators, many property owners were inadvertently caught out by the rules simply because their situation changed and they needed to move on from the property.

When the bright-line period was extended to five years in March 2018, this issue became even more of a problem.

The latest changes will see the bright-line period increase to ten years. As a result, we can expect many more transactions to be captured, so much so that the rules now feel less like a tax on property speculators, and more like a capital gains tax.

The most recent changes to the Bright-line Test are not quite as simple as just extending the bright-line period to ten years. There are nuances around ‘new builds’ and main home exemptions.

‘New builds’ will not be impacted by the extension and will instead remain subject to the five-year time period. The Government has not yet defined what constitutes a ‘new build’, however, it has been suggested it could include properties acquired within a year of a Code of Compliance being issued.

The main home exemption has changed under the ten-year test and will now only apply if the property is used 100% of the time as a main home.

Previously, residential land would not be subject to tax under the Bright-line Test if the property was used more than 50% of the time as a main home for more than 50% of the time the property was owned. This was an all in/all out test, whereby, provided you satisfied the ‘predominance’ (more than 50%) test, the property was not subject to tax under this rule.

Now, if the use of the property as a main home is less than 100%, when a property is sold for a gain, the use will be apportioned between the period that the property was used as a main home and the period that it wasn’t.

For example, under the five-year test, if a person owned a property for three years and lived in it as their main home for two of those years, the main home exemption would have applied. This is because it was predominantly (greater than 18 months) used as their main home.

Under the new rules, one third of the gain arising from the sale of the property would now be subject to tax, because it was only used as the main home for two years, not the entire three years. However, there is a rule that allows for a temporary (less than 12 months) change of use from being a main home for instances such as when a property is not used as a main home while it is being sold.

Another minor change has been made so rental activities are no longer able to be claimed under the ‘business premises’ exclusion. This change means short-term rentals might no longer be treated as a business premises and may be excluded from the rules.

As noted above, the extension to the Bright-line Test will apply to residential land acquired on or after 27 March 2021. So, if you have entered into a contract prior to this date then you should still be subject to the five-year Bright-line Test unless there are certain conditions on the contract, such as a due diligence clause as at that date.

Interest Deduction

The Government has also proposed removing the ability to claim a tax deduction for interest incurred on a residential property, unless the borrowings are for a ‘new build’.

While this change has been widely publicised as a potential ‘loophole’, we think it could be argued that the removal of interest deductibility for most landlords is a significant and unprincipled amendment to the tax system.

It is a fundamental premise in our tax system that if revenue is taxable, the costs associated with deriving that revenue are tax deductible. For instance, taxpayers will continue to claim interest deductions on borrowings to acquire other income generating assets including commercial buildings, plant and machinery, shares, etc.

We also question the need for such a rule given the newly introduced ring-fencing of rental losses greatly reduces the attractiveness of excessively debt leveraging rental properties.

The loss of interest deduction will apply in two separate ways depending on when the property was acquired.

For properties acquired before 27 March 2021 (same rule as above), the removal of interest deductions will be phased in over a four-year timeframe:

Income Year

Percent of Interest Claim

1 April 2020 – 31 March 2021
1 April 2021 – 31 March 2022 (transitional)
1 April 2021 – 30 September 2021 = 100%

1 October 2021 – 31 March 2022 = 75%
1 April 2021 – 31 March 2023
1 April 2023 – 31 March 2024
1 April 2024 – 31 March 2025

For any property acquired on or after 27 March 2021, any interest cost incurred on the purchase of the property will be reduced to 0% from 1 October 2021.

For those who entered a purchase prior to 27 March 2021 but do not settle until after this date, the guidance suggests they will be entitled to apply the four-year phase out approach.

Similarly, if someone has made an offer to acquire a residential property on or before 23 March 2021 but the offer is not accepted until after 27 March 2021, they will be treated as acquiring the property before 27 March 2021, provided they could not withdraw their offer prior to 27 March 2021.

In both cases, if additional debt is incurred on or after 27 March 2021 in relation to that property, then the new portion won’t be deductible from 1 October 2021.

For those who have leveraged their property to borrow for a purpose that is not for purchasing a residential property (such as shares), it is not expected these loans would be subject to this limitation. Additionally, property developers and builders are not intended to be restricted by these rules.

It is important to note these rules have not been finalised and will be subject to some consultation. This is important as there are a number of questions that need to be answered.


A key purpose of these changes was to, “[tip] the balance away from speculators and back towards first home buyers”[1] , but the reality is there are many who are not speculators who will be greatly impacted by these changes. Certainly, the traditional landlord will feel harshly done by, especially on the back of changes to the Residential Tenancies Act.

Given the complexities of the changes and the nuances involved, it is important to consider your circumstances and seek advice to determine the best path forward. For assistance or further information, please get in touch with the Findex Tax Advisory team who can assist you with this process.

Watch our Controversial Tax Changes for Residential Property webinar recording

Controversial tax changes - does residential property still make dollars and sense?

Watch our webinar recording with Tax Advisory Partners Daniel Gibbons and Ryan Watt, and Wealth Partner Craig Smith, who will discuss the recent controversial tax changes announced by the NZ government that took effect on 27 March 2021.



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March 2021


Daniel Gibbons
Author: Daniel Gibbons | Partner