The government has unveiled its highly anticipated plan to ‘turn down the heat’, in the property market and slow the ever rising house prices.
This article proposes to provide you with an overview of this plan. While these proposed changes remain subject to consultation and amendment prior to being introduced into legislation, given the current political landscape, it is likely that this plan will be put into place as announced.
Irrespective of the above, some key dates announced as part of the plan occur as early as this Saturday, and so we feel that it is important to provide you with an overview of the changes as they stand as they may affect a range of decisions, particularly with respect to property investment in the coming months.
Tax Implications for Investors
Perhaps the biggest blow to investors to come from Tuesday’s announcement is the removal of interest deductibility for residential investments for properties purchased after 27 March 2021. This change will take effect from 1 October 2021 and means that the majority of investors settling property purchases after this Saturday will no longer be able to offset their interest costs against rental income for tax purposes.
Of significance is the suggestion that new builds will be excluded from this rule, and as such, investors will still retain the ability to offset interest costs in this way, on the basis that the property purchased is a new build.
For those who already have investment properties, this change will not take effect immediately. It will be phased in over the next fice years with the intention that from 1 April 2025 no investors will be able to offset interest costs, save for those properties captured by the suggested new build exemption.
The objective here is to ‘level the playing field’ for first home buyers who are currently competing with investors to purchase existing residential property.
When a Property is Acquired
Given the impending changes, the date on which you may consider a property as ‘acquired’ will play a key role in whether a purchaser will be caught by this new regime.
For tax purposes, a property is generally considered as ‘acquired’ on the date a binding sale and purchase agreement is entered into.
This means that if you entered into an unconditional agreement for sale and purchase prior to the announcement on 23 March 2021, then you can treat the property as being acquired prior to 27 March 2021 and accordingly still fall within the old regime.
First Home Buyers
The plan as outlined by the Prime Minister, Jacinda Ardern, and the Finance Minister, Grant Robertson, also makes a number of changes to existing regimes, some of which target those who are purchasing their first home. Briefly, these include:
- First Home Grants, will be available to a larger range of New Zealanders. This has been achieved by:
- raising the caps of house prices captured by the system;
- raising the maximum household income for applicants; and
- lowering the deposit required to only 5%.
- A fund of $3.8 billion has also been put into a ‘Housing Acceleration Fund’ aimed at accelerating housing supply in both the short and medium term and also footing the bill for infrastructure to support housing development. No further information has been provided as of yet with respect to timelines or targets.
Bright-Line Test – From Five years, to Ten Years
In addition to the changes contemplated above, the government also announced an amendment to the timeframe for the bright-line test. This amendment will affect the way tax is charged on capital gains earned from investment properties.
The bright-line test, as it currently stands, applies to the sale of residential land which was acquired after 1 October 2015. This test provides that if residential land has been acquired after that date and then on-sold within five years, any capital gains made on that sale will be taxable. The main exclusions to this rule are where the property concerned is a main home, inherited land, or transferred due to a relationship property agreement.
As a result of the announcement on Tuesday, the government is intending to double this length of time from five years to 10 years from 27 March 2021. Investors will accordingly need to retain their investment properties, purchased after 27 March 2021, for a period of 10 years in order to avoid the conditions of the bright-line test. Interestingly, however, the test will remain at the original five years for new builds purchased after 27 March 2021.
The current exclusions to this regime being main homes, inherited land or transfers as a result of relationship property agreements will likely remain in place, however it’s important to note that the ‘main home exclusion’, may only be used twice in any two year period.
Change of Use of Residential Property
In addition to the above changes around the bright-line test, the government also intends to introduce rules around the change of use of a main home.
Any residential property used as the owner’s main home for their entire ownership will remain exempt from the bright-line test.
For newly acquired residential properties, including new builds, the government will introduce a ‘change of use’ rule. This rule proposes to change the way tax is calculated if the property was not used as the owner’s main home for more than 12 months at a time during the applicable bright-line period.
If a property owner switches their property from their main home for a short period, being less than 12 months, then they do not need to count that as a change of use and this period will be considered as the property remaining the main home.
If the property owner switches the property from their main home for a period longer than 12 months, they will be required to pay income tax on a proportion of any capital gains based on the length of time the property was not used a main home. The intention is that this new rule will make the tax calculation fairer when it comes to changes of use, and gets rid of the current ‘all or nothing’ regime.
If you have concerns with respect to any of the proposed changes, or if you would like to discuss your needs in light of them please do not hesitate to get in touch with one of the team at Haigh Lyon.