Explaining National’s Property Tax changes

The new national government has made several changes to the tax laws that effect rental properties. Below is a summary of the changes.

Bright-line tax

The Bright-line Rule will revert to its original form, 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, 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.

GST on Airbnbs

New legislation, commonly known as the “App Tax”, has been enacted to provide specific GST rules around the use of marketplace services such as Airbnb.

Suppliers of "listed services" made through an electronic marketplace will be subject to this GST, regardless of whether the provider is GST-registered.

That includes the supply of accommodation, other than accommodation that would be GST-exempt, that is performed, provided, or received in New Zealand.

From 1 April 2024, marketplace operators (such as Airbnb and Bachcare) are required to collect and return GST at the standard rate of 15% on accommodation provided through the operator, even if the underlying supplier (the property provider/owner) earns under $60,000 annually and is not GST-registered.

For those who aren't GST-registered, the GST charged will be in addition to your rental. That may mean that the rental you receive is reduced by the amount of the GST charged.

A non-registered property provider/owner will receive an 8.5% flat-rate credit from the marketplace operator that is designed to cover the GST that would have been claimable on the property’s expenses. Under this scenario, the property provider/owner cannot claim GST on expenditure related to the property.

This means the 15% collected by the marketplace operator is then split between the Inland Revenue Department (IRD) and the property provider/owner, meaning the marketplace operator must pass 8.5% on to the property provider/owner and the remaining 6.5% to IRD.

For a property provider/owner who is already GST-registered, the marketplace operator will collect and return the GST to the IRD on the rental charged to guests. The property provider/owner will receive the rental income net of GST and will return this as a zero-related supply. The property provider/owner can continue to claim GST input credits on their property expenses.

The property provider/owner is responsible for advising the marketplace provider of their GST registration status, so they are not paid the 8.5% flat-rate credit. A flat-rate credit incorrectly received by the property provider/owner will be required to be paid to the IRD.

As an aside, the changes will have an income tax consequence in terms of the income returned and the amount of deduction claimed for property providers/owners who are not GST registered.

Opting out of the new marketplace rules

Some property providers/owners with larger-scale operations can opt out of the new marketplace rules. Broadly, this is possible if a property provider/owner:

• Has taxable supplies of over $500,000 in a 12-month period; or

• In a 12-month period, provides at least 2,000 nights of taxable accommodation on an electronic marketplace.

Property providers/owners remain responsible for their GST obligations regarding supplies they make through electronic marketplaces if they opt out of the GST marketplace rules.