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The New Zealand government has announced a number of changes that will directly impact on taxpayers who own a residential rental property in New Zealand.

Some of the changes will only impact on you if you purchased a house on or after 27 March 2021 while some of the changes will impact on all taxpayers who own residential rental properties in New Zealand.

The changes to the tax rules have been brought in by the government, they say, in order to reduce the demand on New Zealand housing so that it is more affordable for homebuyers.

New Zealand Capital Gains (the bright-line test)

New Zealand does not have a capital gains tax regime like we do here in Australia. But over the last few years they have applied one on investors who own a residential rental property in New Zealand.

Up until this most recent change, the bright-line test rule applied in the following circumstances:

If you acquired the property prior to 1 October 2015

If you purchased the residential rental property before 1 October 2015, the bright-line test did not apply. In that case you would only be assessed on capital gains if you had purchased the property with the intention of selling it a profit.

If you are unsure you really should speak to us.

If you acquired the property between 1 October 2015 and 27 March 2018

If you purchased a residential property between these dates and sold the property within 2 years of purchasing it, the bright-line test may well apply. If you sold the property more than 2 years after purchasing it, the bright-line rule will probably not apply to you unless you purchased the property with the intention of selling it at a profit.

If you acquired the property between 27 March 2018 and 27 March 2021

If you purchased your residential rental property between these dates and you sell the property within 5 years of purchasing it, the bright-line test may well apply. If you sold the property more than 5 years after purchasing it, the bright-line rule will probably not apply to you unless you purchased the property with the intention of selling it at a profit.

If you acquired the property after 27 March 2021

The new bright-line capital gains tax rules applicable to rental properties acquired on or after 27 March 2021 will now be subject to capital gains tax on the sale of that property if it is sold within 10 years of acquisition.

As the political justification is to reduce the demand on housing for the benefit of homebuyers, the government is trying to ensure that this will not impact on the supply. For that reason, “new build” investment properties will remain subject to the 5 year bright-line test (see previous paragraph).

It is yet to be announced what sort of housing will be regarded as “new build”. It is likely to include properties that are acquired within one year of receiving their code compliance certificate under New Zealand’s Building Act 2004.

It is likely to be some months before the definition of “new build” is settled and legislated for.

Removal of interest deductibility

The biggest change that will impact on all rental property owners who are paying a mortgage raised to purchase (or finance renovations to) the property is that the ability to deduct interest will be removed.

Again, “new builds” (yet to be defined) will retain full interest deductibility. But it stands to reason that if you have purchased an existing property, or you are renting out a property that you used to live in, then it is likely this change will impact on you.

However, the details of the removal of the interest deductibility is yet to be legislated. There is a thought that it may be removed over a period of time (there is speculation that it may be wound down over a period of 5 years) so watch this space.

Although yet to be legislated, what might be legislated is:

  • interest on residential rental properties purchased on or after 27 March 2021 (excluding new builds) may be entitled to deduct interest until 30 September 2021
  • if you purchased your residential rental property prior to 27 March 2021 the amount you can claim may be phased out over 4 or 5 years. Again, the specifics have not been announced and are subject to a consultative process

We prefer not to comment on things until the legislation has passed. We are making a change on the off chance that you could be in the process of purchasing an investment property in New Zealand and this may help with your decision.

However, again this is speculation on our part and the ultimate rules will be determined by what is passed by Parliament which could (although is unlikely to be) significantly different from this.

 

The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.