Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill
The Bill seeks to amend the Income Tax Act 2007 and the Tax Administration Act 1994 to, amongst other things:
limit the deductibility of interest on residential investment property
introduce a shorter bright-line period of five years for owners of new build properties
make technical changes to the bright-line rules associated with the recent extension of the bright-line test to 10 years and the proposed introduction of the five-year bright-line test for new builds
give employers another option for paying fringe benefit tax on benefits given to employees
make remedial changes to the business continuity test for losses so the policy intent is clearer.
It is scheduled to come into effect on 1 October 2021.
Changes to the Brightline Test
(Clause 48): The proposed amendment would change the bright-line test so that the amount of income derived on the sale of a property used as a main home would not be reduced where the person has used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring and disposing of residential land.
(Clause 49) The proposed amendment to the main home exclusion from the bright-line test would clarify that:
a person may still qualify for the exclusion if they have multiple periods, each of less than 12 months, where the property is not used as a main home, and
a person may not use the reduction formula in the bright-line test or access the main home exclusion for a period of non-main home use exceeding 12 months by claiming that the period is multiple consecutive periods of less than 12 months
The proposed amendments would apply to residential land acquired on or after 27 March 2021. However, it would not apply to property acquired on or after 27 March 2021 as a result of an offer made by the purchaser on or before 23 March 2021, provided the offer could not be revoked before 27 March 2021.
Interest Deductibility
In summary, this Supplementary Order Paper proposes to:
limit interest deductions for investors in residential property; and
address issues arising out of the extension of the bright-line test from 5 years to 10 years.
Property development and new builds will be exempt from the interest limitation rules.
The key features of the interest limitation proposal are:
the rules would apply to interest incurred on or after 1 October 2021;
for pre-existing loans relating to property acquired before 27 March 2021, interest denial would be phased at 25% per year over four years;
loans drawn down on or after 27 March 2021 would be subject to full limitation from 1 October 2021, unless the property was acquired as a result of an offer made on or before 23 March 2021 that could not be withdrawn before 27 March 2021;
property developers would continue deducting interest expenses as incurred;
new build properties would be exempt from the interest limitation rules; and
interest deductions would be allowed when a taxable sale of residential property is made.
To qualify as a new build, the property generally has to have received its code compliance certificate (CCC) on or after 27 March 2020. A property that received its CCC up to one year before the rules were announced (on 27 March 2021) can therefore have new build status.
The new build exemption runs for 20 years from the date the CCC is issued and transfers with the property – ie, successive owners also get the benefit of interest deductions (subject to normal rules governing deductibility).
Build-to-rent schemes are generally unaffected during the development phase and for 20 years following completion given the land development business exemption, development land exemption and new build exemption.
Developers are generally unaffected due to the land development business exemption and development land exemption.
For companies that are not ‘close companies’, the limitation rules do not apply if the value of the impacted property is below 50% of the value of all company assets.
Conversions of commercial property into self-contained business, provided less than 50% of the company’s total assets by value are residential properties that would otherwise be subject to these rules. Widely-held companies exceeding the 50% threshold and companies that are ‘close companies’ (five or fewer individuals or trustees own more than 50% of the shares) will need to apply the rules to any affected properties. This may result in a denial of a portion of their interest expense. There is some complexity around how interest expenditure will be traced (or deemed to be traced) to affected properties.
Certain other residential or quasi-residential types of properties are unaffected. This includes:
the portion of the main home used to earn income (e.g. flatmates or boarders).
retirement villages and rest homes.
hotels, motels and hostels.
houses on farmland.
bed and breakfasts (where the owner lives on the property).
employee and student accommodation.
property used for emergency, transitional or social housing when leased to the Crown or to a registered community housing provider.
land outside of New Zealand; and
residential land collectively owned by a Māori authority (or an entity eligible to be one) and used to provide housing to a member of the relevant iwi or hapū (papakāinga and kaumātua housing), land transferred as part of a treaty settlement and certain types of Māori land title.
Roll-over relief
Roll-over relief will be available from 1 April 2022 for certain transfers between related parties, including to most family trusts, partnerships, look-through companies, Māori authorities, and as part of a settlement claim under the Treaty of Waitangi. This is in addition to the roll-over relief already available for relationship property settlements and amalgamations, and full relief for transfers on death.
Roll-over relief will treat the transferee as having acquired the property on the date (and for the cost) that the transferor originally acquired it for both the bright-line test and the phase-out of interest deductibility. There is no roll-over relief for transfers out of a trust, or for transfers between family members.
For the above reasons transferring an impacted residential property to a family trust before 1 April 2022 could have significant adverse tax consequences.
Non-active estates return filing
(Clause 143): The Tax Administration Act 1994 (TAA) provides an exclusion for trustees of non-active trusts from their tax return filing obligations under section 43B. However, this section does not include non-active estates. This gives rise to a compliance cost that could be saved if the estate were able to apply for an exclusion under section 43B.
The proposed amendment would amend section 43B to extend the non-filing provision to include non-active estates. This amendment would apply from 1 April 2022.
Further Information and Submissions
Public submissions are now being called for Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill. The closing date for submissions is Tuesday, 09 November 2021.
Click here to read Inland Revenue Commentary
Click here to read: Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill
