Since our last update on the Bright-line rule changes, the NZ government has released the legislation necessary to give effect to its highly anticipated property tax changes.

The headlines are:

• Bright-line rule – reinstating this to a 2-year bright-line period

• Interest deductibility – reinstating full interest deductibility (over a 2-year period) on residential land

• Depreciation – removing depreciation from buildings.

The proposed legislation will be introduced as an Amendment Paper to Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill, which will need to be passed before 31 March 2024.

The changes are largely as expected, but there are a few surprises sprinkled within.

Bright-line Changes

As expected, the Bright-line Rule will revert to its original form, being a 2-year test. Since its introduction in 2015, this rule has been tinkered with constantly, to a point that it has now expanded to a 10-year test (5-year test if treated as a “new build”).

However, from 1 July 2024, if a person was to sell their residential property it will now be subject to the 2-year bright-line rule, rather than the outgoing 5 or 10 year periods. This means it will have a retrospective effect if the “bright-line end date” is on or after 1 July 2024.

This is an important point to note as the bright-line end date is not when title transfers but will usually be the date a person enters into a contract for sale. For example, if a contract for sale was entered into on 20 June 2024, it will subject to the existing bright-line rules, not the 2-year test.

Continuing with the theme of reinstatement, the main home test is largely reverting to its original version. When first introduced, it applied if the property was predominantly used (largely dictated by area) for most of the time it was owned as the person’s main home. This did result in some unfair outcomes at times, which became more pronounced as the bright-line test expanded. This is why apportionment-based tests were introduced, which became more targeted to provide relief to the extent the property was used as a main home.

This is a double edge sword, while the predominant based test is certainly simpler to apply, there will be some who benefited under the apportionment approach.

Thankfully, one recent addition that is being retained was the change to not disadvantage a person for the period of construction. If applicable, the period of construction does not count towards a period of ownership when assessing whether the main home exemption applies.

One unexpected surprise is the expansion of the rollover rules. The rollover rules were introduced to deal with a long-standing issue with the bright-line rules: Associated person transfers were subject to the same bright-line treatment as third-party transfers. Under eligible rollover relief the purchasing party inherited the original purchase date, so the bright-line period didn’t reset. However, rollover rules were restrictive and complex. Further, there was still potential for the transferor to be subject to the bright-lines rules on transfer.

The proposed change will allow rollover relief to apply to any “associated persons” transfers. However, the associated persons must have been associated for at least 2 years before the date of transfer. The relief can also not be applied more than once in a 2-year period.

This is a welcome change as the original intent of the rules were focused on property speculators, not transfers of property between associated persons. Although it is important to clarify exactly who is an associate under the Tax Rules.

Interest deductibility

The new government is going to reinstate interest deductibility but with some changes.

Firstly, there will not be any change to the current tax year. Instead, the changes will begin from 1 April 2024 when 80% of interest costs can be claimed, and with 100% reinstatement of interest available from 1 April 2025.

To deal with the phasing back in, the changes will be done in two tranches.

In the first instance, the interest deductibility rules will remain in force as they currently are, but will allow 80% of interest costs as a deduction. This means that those currently exempted from these rules, such as a new build, will continue to be exempted.

However, the rules as drafted will permit those who are currently denied any deduction (i.e. those who acquired property after 27 March 2021 or took out new lending since then) to claim 80% of their interest cost from 1 April 2024. This will include foreign currency loans, which were previously denied any interest deduction.

The interest deductibility rules will then be fully repealed from 1 April 2025 when all property owners are on the same footing.

What won't change is the ability to offset denied interest against tax that might arise on the sale of property (such as under the bright-line rule).

Depreciation

As anticipated, from 1 April 2024, commercial buildings will again no longer be eligible for depreciation on the building component. The reinstatement of building depreciation was a short lived measure during Covid that both major political parties campaigned on removing.

It is important to note that buildings will remain depreciable property, but they will have a depreciation rate of 0%.

With the removal of depreciation there will be a reinstatement of the old “notional fit-out” regime introduced the last time building depreciation was removed. This allows buildings acquired in or before the 2010-11 income years to deem a portion of the building’s adjusted tax value as fit-out that can still be depreciated.

There is a calculation that considers the intervening periods when depreciation was allowed.

Therefore, commercial property owners should consider whether their building fit-out position is correct.

The next process is for the legislation to be introduced into parliament and accepted before it’s passed into law, which is expected this month.

For more information on how these changes will impact you specifically, contact our Findex Tax Advisery team today.

Findex Group Limited, trading as Findex.

While all reasonable care is taken in the preparation of the material in this article, to the extent allowed by legislation Findex Group Limited accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex Group Limited assumes no obligation to update this material after it has been issued. You should seek professional advice before acting on any material

The title 'Partner' conveys that the person is a senior member within their respective division and is among the group of persons who hold an equity interest (shareholder) in its parent entity, Findex Group Limited. The only professional service offering which is conducted by a partnership is external audit, conducted via the Crowe Australasia external audit division and Unison SMSF Audit. All other professional services offered by Findex Group Limited are conducted by a privately-owned organisation and/or its subsidiaries

This document contains general information and is also not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser

© Findex Group Limited 2024. All rights reserved.

18 March 2024