National’s Tax Plan – the good and not so flash
31 August 2023
The National Party released its long-teased-out tax plan this morning. On the one hand, one can applaud National for focussing on delivering tax savings to middle income earners, and removing the unprincipled changes to our property tax rules. On the other the announcement was missing a statement on the trustee’s tax rate change to 39%, which many were hoping National would remove, and the change to remove depreciation on commercial property fell into the same heffalump trap as was done when first removed by National in Budget 2010.
The proposal to roll back the bright-line rules (that tax residential property purchased and sold within 10 years currently) to two-years as introduced is to be welcomed. The rules, as introduced, were more aptly targeted at property that was potentially speculative in nature. Further, the extension to 10 years came with a raft of additional complexities that created unnecessary tax traps and compliance costs.
The arbitrary nature of the bright-line rules gives rise to tax outcomes that should not have happened and that the extension of the bright-line to 10 years exacerbated this. While the bright-line rules were enacted with the best of intentions to better capture property speculators, they remain imprecise. Their arbitrary and poorly targeted nature combined with the design of the main home exception means rules are unfairly catching out everyday property owners who had no intent to profit from a land sale.
Our firm is currently defending a client being pursued by Inland Revenue who maintain they have a pattern of purchasing and selling main homes. This is just a ridiculous argument to be having when the person concerned moved homes for entirely personal reasons. I hope that National will consult on getting rules that cater better for the raft of unforeseen circumstances that arise. For example, clients that have had to sell homes because they lost employment – this should not generate taxable income.
Rolling back the prohibition on the deductibility of interest costs on rentals is welcome. Prohibiting deductions for costs incurred in owning income-earning assets is completely contrary to principled tax policy.
Presumably this will also mean all the “new-build concessions”, which allowed full interest deductibility for rentals and limited the bright-line test to five years, will be flushed out of our tax system as well. Good riddance.
Disappointingly, no mention was made of the rules that limit tax deductions against rental income to the income derived until the property is sold. Again, as with denying interest deductions, the policy solution is not to deny deductions as a means of trying to reverse tax an asset.
Removing the changes to GST on the Gig Economy will no doubt be welcomed by those people affected. However, these rules did ensure that those in the gig economy operating outside the tax system were brought into tax base. That said, changes to the employment laws may partially impact on the requirement for the gig economy to be GST registered in any event.
The minuses of the announcement were no statement on the tax changes to the trustee’s tax rate to 39% and the proposed changes to commercial building depreciation. Problematically, the 39% tax rate, which was targeted at people diverting personal services income through trusts, taxes both the personal income diverted and also income from savings. There are better, more efficient measures to deal with income splitting through trusts and one would have expected an informed National Party to have at least stated this will be reviewed or put out for consultation to consider the policy objectives and potentially better solutions rather than the sledgehammer looking to smash a nut approach as proposed by Government.
On the commercial building depreciation rate – clearly, lessons were not learnt from 2010 when this was done the first time around. As well as meaning we are now overtaxing the primary sector, as their farm buildings and the like really do depreciate, the change creates the addition of very large deferred-tax liabilities on the balance sheets of many large commercial property owners. This comes from the fact that buildings held to derive income through use will continue to be depreciated for accounting purposes but not tax – the difference equalling an accounting liability. Last time around, this created a huge furore as it added hundreds of millions of dollars of liabilities to New Zealand balance sheets.