“Don’t panic” … As Lance Corporal Jones might say on 23 March 2021

Date

You may have heard that the sky is falling in.  It is not.  Those of us who have been around a long time know that tax policies come and go, life moves on, the wheels of life continue to turn. 

You may have heard that doubling the Bright-line rules from 5 years to 10 years is bringing in “Capital Gains Tax by Stealth!”  It is not.  It already exists and is already a Capital Gains Tax without the usual benefits like CPI indexing (there is no stealth involved).

You may have heard that the Government is changing the rules if you do not live in your family home for more than 12 months during the period of ownership.  This is because they want to introduce “fairness” to the Bright-line rules.  Unfortunately, the Government gives, and the Government takes away.  Under the current rules if the “land has been used predominately, for most of the time the person owns the land, for a dwelling that was the main home…” (i.e. 50%) you have a total exclusion from the Bright-line rules (unless you use that exclusion too often).  You might have heard for the new rules for new property acquired on or after 27 March 2021, if you are absent for 12 months or more during that ownership period you will be taxed on the capital gain on your property when you sell it – subject to an apportionment for when you did live in it. You heard right.  The apportionment is based on a formula to maybe take some of the 100% gain out of the equation – you will need a calculator to work it out, good records and a good accountant and/or lawyer to advise if you qualify.  There is no inflation adjustment involved.  10 years is a long time.  Circumstances change.  This rule could affect a significant proportion of the population and drive different legal and social behaviours for decades to come. On the bright side, it sounds like “new builds” will be excluded from the 10 year Bright-line rules (but remain under the 5 year rules).  What is “new” has not been decided, possibly those acquired within 12 months of code of compliance being issued  – the Government will consult on this.  Then backdate their decision to 27 March 2021. 

You may have heard that the Government is about to eliminate the interest expense against your rental income – it appears allowing a deduction just encourages people.  Every business does the same thing: borrow money to buy something, and sell something for (hopefully) more than it cost.  This concept is quite often called “Economics 101”.   Why is a residential rental property any different to any other business? 

You may have heard that the Government is “considering closing a loophole on interest-only loans to speculators.”  Interest only loans are used for a number of reasons, in a number of businesses and households.  If by “speculators” the Government means “property speculators”, then a well informed Government would know that “property speculators” are actually already subject to income tax on their property gains.  Not a Capital Gains by Stealth, not a Bright-line rule, not falling into some loophole – they are just taxable on their profit.  [note the full stop]

Exhibit A – The Income Tax Act 2007 – specifically section CB 6 (and we quote): 

CB 6 Disposal: land acquired for purpose or with intention of disposal

Income

(1) An amount that a person derives from disposing of land is income of the person if they acquired the land—

(a) for 1 or more purposes that included the purpose of disposing of it:

(b) with 1 or more intentions that included the intention of disposing of it.

Exclusions

(2) Subsection (1) is overridden by the exclusions for residential land in section CB 16 and for business premises in section CB 19.

What’s happening right now?

On 23 March 2021 the New Zealand Government announced then introduced a Supplementary Order Paper (SOP) to the existing Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill.  There are a number of changes including:

  • Moving the Bright-line period from 5 years to 10 years, with effect from property acquired on or after 27 March 2021
  • Changing the Main Home exclusion rule for Bright-line to capture property that has not been the main home of the taxpayer for at least 12 months during their period of ownership, for property acquired on or after 27 March 2021
  • Bringing in short-term rental accommodation into the Bright-line rules by removing the business premises exclusion for some types of property with effect for property acquired on or after 27 March 2021
  • Bringing in short-term rental accommodation into the loss ring-fencing rules by removing the business premises exclusion for some types of property for all relevant property with effect from the 2021/2022 year (for most taxpayers this is from 1 April 2021).

Also included in the SOP is the previously announced changes to the loss continuity rules for companies (business continuity test), changes to rules around donating trading stock (Covid-19 related) and to allow Mycoplasma bovis-affected farmers to reconsider previous income equalisation deposits.  There is also correction to earlier changes when the 39% tax rate was introduced. 

You can read all about it at this link

FYI – we expect this Bill to be adopted and in place within days.  The errors and emissions will be corrected at a more leisurely pace.

What will take some time to come into place?

Interest deductibility – the Government are proposing:

  • no interest deduction for borrowing on residential property acquired on or after 27 March 2021, from 1 October 2021
  • interest on borrowing on pre-owned residential property before 27 March 2021 will be allowed, but by a decreasing percentage over 4 years from 1 October 2021, so no deduction at the end of year 4
  • no interest deduction on increased borrowing on existing property on or after 27 March 2021, with effect from 1 October 2021   

Fortunately, the Government will allow time for consultation on interest deductibility.  You may want to consult.

It’s been a busy day.  Here at Shellock we welcome questions, we try to answer them.

You can contact us at enquiries@shellockconsulting.co.nz


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