Yes, it has been a while since we commented in our blog about all things tax (or anything else to be fair). But we have been saving them up for your reading pleasure before the New Zealand Coalition Government releases their 30 May 2024 budget. There are a number of changes you need to be aware of. Further changes are also afoot, and it looks like the kitchen may be gutted and a new fitout installed.
“No new taxes”
Yeah, well that may depend on your definition of “new”. Certainly, from 1 April 2024 if you are booking via an international website for a ride, accommodation, food delivery etc provided in New Zealand you may now be charged GST on that service. If the underlying supplier was already registered for GST then GST was built into the price. The change is where they were not. Now, the overseas “market place” supplier will be charging GST. A small amount for the individual consumer, but a large contribution to the Government coffers.
On-line gaming sites are now also charged a gaming duty of 12% on their New Zealand sourced gambling profits made by offshore GST registered suppliers on or after 1 July 2024. It will exclude the existing “consumption charges” already imposed on sports and racing betting made through offshore operators.
Both these changes were proposed in the 2023 Tax Bill by the previous Government last year and have now been passed.
Winding back the Bright-line clock
What is new, is the Bright-line test of 10 years (or 5 for “new builds”) is being wound back to 2 years from 1 July 2024. The changes also mean that those already in the 10/5 year regime can after 1 July 2024 escape the Bright-line rules if they have passed 2 years. The Family Home exclusion is also returned to the original rules, which is living in the property for 50% or more of the period of ownership. From 1 July 2024 the rollover relief rules are also expanded.
Our thoughts on this? The changes to the Family Home exclusion are fair and reasonable, as the repealed rules were complex and often cruel in their execution. Ten years to hold onto a property was always too long, where people’s work and personal circumstances could result in moving more frequently, especially with high interest rates causing indebted landlords to sell out earlier than intended. However, our view is that 2 years is too short and will result in a significant rise in property speculation. To justify and offset returning to 2 years, the Inland Revenue should be looking to investigate property speculation under the usual land taxing sections, such as buying with the intention of resale, subdivisions and property developments with short term ownership periods.
Deductions and no deductions
And speaking of interest and landlords, for the 2024/2025 year they will be entitled to claim interest expenses against their gross rental income, to the tune of 80%, rising to 100% the following year. The percentages will apply regardless of when residential property was acquired or lending drawn down. However, for those with non-standard balance dates there is some tweaking required. Much criticism has followed this move, but to not allow a deduction was farcical when other investments of many stripes were allowed interest deductions without quibble. We should also remember that landlords of residential properties may still not enjoy this tax deduction because there remains “ringfencing” of resulting tax losses only available in practice if they can be offset against residential rental profits (revenue and taxable capital gains).
Giving and taking is a natural part of any Government’s raison d’être. The same tax amendments have removed depreciation deductions against commercial buildings, effective from the start of the 2024/2025 tax year. Such deductions are already excluded from residential buildings and follows the well established logic that (in most cases) buildings do not decrease in value. In other cases where an asset is known to not (likely) reduce in value no depreciation is permitted so overall this is a fair and reasonable change. Costs of repairs and maintenance remain deductible along with depreciation on fixtures and fittings.
In whom can I trust?
The tax amendments have also increased the Trustee tax rate from 33% to 39% effective from the 2024/2025 tax year. While this was part of the original bill and the prior Government’s agenda, that proposal has gone through. As a nod to the tens of thousands of Trusts will very modest incomes, a last minute change has provided a 33% tax bracket where the Trustee income is $10,000 or less. If over this amount the 39% tax rate will apply to all the Trustee income. The $10,000 threshold seems unusually low and if going on previous thresholds, will likely remain the same for the next 20 years.
There are four carve outs from the 39% tax rate. For Estates its income will be taxed at the lower 33% for the year of death and the following three years. For special trusts for disabled persons will continue to be taxed at the 33% tax rate. And finally, Energy Consumer Trusts, and legacy Superannuation Funds (if not already taxed as a company) will both remain taxed at 33%.
An anti-avoidance provision has been introduced where if the Trust’s income is distributed to a Company beneficiary (tax rate normally 28%) the Company will be taxed at 39% instead. This type of distribution from Trust’s to Company’s frequently occurs in Australia (without any apparent anti-avoidance rules). This rule will be limited to close companies where a settlor of the trust has natural love and affection for a (direct or indirect) shareholder of the company.
The misalignment between the top personal tax rate (39%) and the former Trustee rate (33%) was always going to be a problem and was the justification for the increased Trustee tax rate. The Inland Revenue reports an almost 50 percent spike in income subject to the Trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year. Yet, earlier publications made it clear that the majority of Trusts had very low income. A totally predicable outcome of the misalignment deliberately created by the previous Government.
While this 39% Trustee tax rate will adversely affect many Trusts, a high number of beneficiaries in those Trusts are well under the personal tax rate of 39%, so we will see a significant rise in beneficiary income distributions. Often distributing income to beneficiaries defeats the (non-tax) reasons for growing and protecting wealth in a Trust, and we can expect to see abnormal behaviour to work around these non-tax consequences.
What else has happened?
The Taxation Principles Reporting Act 2023 imposed an obligation on the Commissioner of Inland Revenue to report on New Zealand’s taxation settings against a set of approved taxation principles. The Act was repealed by the incoming Coalition Government with effect from 23 December 2023.
Trading Stock rules are changing for disposal at less than market value in many cases, but retained when disposing for own use or consumption, to an associated party or outside the normal business activities of the entity.
The 2024 Government Budget is set for 30th May. We can expect to hear more about the realigning of personal tax rate thresholds. While these may come into effect on 1 October 2024, it is more likely they will apply from 1 April 2025. In the meantime, the Government and its public entities are seeking significant savings in their budgets, including reducing their employment and contractor costs.
Charities are not immune to belt tightening and tax changes. First, the Inland Revenue has issued an interpretation statement on a charity’s business income being applied to overseas causes, making a percentage of the charity’s profit taxable. Plus, we can also expect to hear more on the Act Party’s support for taxing charities in certain circumstances such as business activities that complete against taxpaying suppliers, or where a low amount of profit is spent on the charitable causes espoused.
