Tax Changes Update - September 2021
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GRA Blogs
Articles by Matthew Gilligan
Most readers will be well acquainted with the fact that we are expecting the interest deductibility rules to kick in from 1 October 2021. You will also likely be aware that as at the time of writing (early September), these rules are yet to be revealed.
This is an entirely unacceptable state of affairs, leaving investors to make purchase and finance decisions not knowing where the goalposts will be in the future. While we await confirmation on issues such as the definition of a “new build”, it is worth noting a couple of aspects of the March tax announcements that are now confirmed law.
10-year bright-line rule
First, the 10-year bright-line rule is now applicable to all residential land purchases on or after 27 March 2021. We are expecting a carveout to be applied to new builds limiting the bright-line period to five years, but the details are yet to be confirmed surrounding this matter. That aside, the 10-year rule bright-line is what you are faced with if you buy a property that is not a new build. A point of detail to note here is that it is the day you enter into the sale and purchase agreement that determines whether you are subject to the 5 or 10-year period. If you enter into a binding agreement before 27 March 2021, the 5-year rule is applicable. A hook to watch out for is when nominating a different entity to settle the purchase. This can lead to a new date of acquisition, shifting you into the 10-year regime. There can be ways around this if you are caught out. Talk to us if you need assistance with this.
Main home exemption
The other change that has now been legislated is the change to the main home definition. Previously if you sold your home within the bright-line period, you were exempt from having to pay tax as long as most of the land was used as your home for most of the time that you owned it. If you satisfied this predominant use test as to area and time, then the whole gain was exempt. This will continue to be the case for properties bought prior to 27 March 2021.
If you buy a property on or after 27 March 2021, the new main home taxing regime applies. This is no longer an “all or nothing” proposition. If the property is used for purposes other than being your home (e.g. renting it or leaving it vacant) for a continuous period of longer than 12 months, then part of the gain will be taxable.
For example, if you sell your home after five years of ownership and during that time there was a continuous period of two years where you rented it out, then 40% of any gain you realise on sale will be taxable. Interestingly, if the property is rented out for two periods of less than 12 months that are not continuous (i.e. you move into the property in between), then the rental use would not count in the pro rata calculation. You would be exempt on 100% of the gain. Migrants to New Zealand also need to be mindful of these rules, as they can apply to overseas homes. Give us a call if you are a migrant and need assistance in this area.
Related party transfers
A glimmer of hope for clients seeking to restructure asset ownership (and their accountants, lawyers and mortgage brokers), is the possible provision for rollover relief for related party transfers. Rollover relief allows for related party transfers of residential rental property to (related party) trusts or LTCs for example, without resetting bright-line clocks or triggering immediate application of interest non deduction rules. It may well be any such rollover relief is limited in application to inheritances or relationship property settlements (which already enjoy such rollover relief under old rules), or this relief could be applied more broadly to related party transfers. Or not at all! Like most aspects of these rules, there is an unsatisfactory void of detail, so we await the legislation to advise on the final position.
Hopefully there will soon be at least draft legislation before parliament on the interest deductibility rules, and I look forward to writing about them as soon as they are available. Keep an eye on GRA's Tax Changes Update webpage, where we will post more information as it comes to hand.
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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