Changes in the residential property tax

There has been many tax changes in the residential property. The Inland Revenue Department's (IRD) focus is to educate everyone in terms of Property Sales, Bright-line, Interest Limitation, and the Purchase of New Builds.

The IRD seen many disparities in these areas, and their focus is a review of all property transactions. They are also focusing on offshore compliance and international tax affairs, to ensure the taxpayers who have offshore income is reported correctly in the tax returns.

 Bright Line Tax 

Bright line tax guide. The IRD has published the guide (IR1227). The bright line tax is changed multiple times over the years. The rules are quite complex depending on which date the property is purchased different rules apply. The bright-line property rule applies to residential property purchased or acquired on or after:

a. 1 October 2015 through to 28 March 2018 and sold within 2 years.
b. 29 March 2018 through to 26 March 2021 and sold within 5 years.
c. 27 March 2021 and sold within 5 years to the extent the property has a qualifying 'new build' on it when sold or 10 years for all other properties

Interest Limitation Rules

In general rule of thumb, the new rules are applied to interest on debt to purchase or operate residential investment property, which is primarily residential property rented to tenants.

Exclusions:

1. Land outside New Zealand
2. Employee accommodation.
3. Farmland
4. Care facilities, hospital, nursing homes etc
5. Commercial accommodation: hotel, motels etc
6. Retirement villages and rest homes
7. Main home

Definition of New Build

The Government has decided that “new- build” residential properties should be exempted from the proposed new interest limitation rules and subject to a  five-year bright-line test (rather than a ten-year test). New build is defined as:

• A dwelling is added to vacant land
• An additional dwelling is added to a property, whether standalone or attached
• A dwelling(or multiple dwellings) replaces an existing dwelling.
• Renovating existing dwelling to create two or more dwellings.

Key points of new rule

• When a property is sold within bright line period. Revenue account rules may apply. Properties taxed on sale under the bright-line rules are held on revenue account only once it is known that they will be sold within the bright-line period. They are not held on revenue account otherwise.
• The Government has agreed in principle that property developers should be provided an exemption from the interest limitation rules.
• The development exemption is intended to cover:
  • land being developed by persons in the business of developing or dealing land or erecting buildings (captured under section CB 7 of the Income Tax Act 2007), and
  • other developments which may not be covered under section CB 7 but contribute to the creation of a new build. For example, persons undertaking a one-off development or developing properties to rent out themselves (if they are not already in the business of developing or dealing in land or erecting buildings).
  • Interest deductibility permission shall be allowed on debt relating to residential investment property, the debt is used for subdivision, development or erecting a new build, and the activity is carried out for the purpose of creating one or more new builds.
• The discussion is being done to discuss properties related to remediation work.

*The above article is a high-level explanation of the methods of calculation, and there may be other technicalities/rules that are applicable. The complexity of the calculations can also vary. Please reach out to us if you have specific questions regarding your situation.

Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.

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