In March 2021, the Government announced two law changes:
Residential property investors are now prevented from writing off interest as an expense when paying tax; and
The bright-line test was extended from five to ten years, so that investors who buy and sell residential property within 10 years have to pay income tax on any gains made.
With the law enacted, unusually consultation is now occurring after the fact.
The Government has released its consultation document on the changes, entitled “Design of the interest limitation rule and additional bright-line rules” (“Consultation Document”). It seeks to clarify how the policies announced in March might be implemented in practice and also gain public feedback on the implementation design for the proposals.
Purpose of policies
New Zealand has faced a surge in residential prices over the past couple of years. It has made homeownership an unattainable goal for many. The Government has announced these changes in response. The overall purpose is to increase homeownership rates in New Zealand and to support a return to more sustainable house price levels.
New builds – an exemption
The Government proposed that new builds are to be exempt from both above changes.
With regards to the extension of the bright-line test to 10 years, where a new build is purchased as an investment property, capital gains tax will only be owed if it is on-sold within the original 5-year bright-line period. Equally, where a new build is purchased as an investment, the interest could be written off as an expense when paying tax.
The purpose of these exemptions is to further drive the market towards the added value on offer through the development of new homes. The thinking is that this will increase supply and moderate the recent rapid increases in house prices.
What is a ‘new build’?
The consultation document proposes a definition of ‘new build’ and seeks consultation on what the definition should be.
On the face of it, the answer to this question may appear obvious. However, there is a huge variety of property types out there. With a significant incentive in place to own new builds, the definition of this term will come under scrutiny.
The discussion document states that a home should be considered a ‘new build’ if the build clearly increases the residential housing supply. This will occur in the following instances:
- Simple new builds
Where one or more dwellings that are self-contained (having their own kitchen and bathroom) have been added to vacant land and are code compliant. This extends to instances where an existing dwelling is removed and replaced with a new dwelling.
- Complex new builds
Where one or more dwellings are added to a property that already has residential dwellings on it. This includes attaching a new dwelling to an existing structure (for example, one might add a second storey). Taking an existing dwelling and splitting it up into additional self-contained dwellings is another instance. For example, a 9-bedroom mansion might be renovated to provide a new self-contained, 3-bedroom dwelling.
The complexity is inserted here because of the presence of existing dwellings on the property. Apportionments are likely to be required to allow for the carving out of the new builds from the newly implemented interest limitation and bright-line extension laws.
- Commercial to residential conversions
A new build is created where a commercial building is converted into self-contained residential dwellings. For instance, where an office building is converted into a number of apartments, each of those apartments is considered a new build.
Submissions and uncertainties
With the submission process coming after the enactment of these laws, there are inevitable uncertainties that will arise. One such area is the definition of a ‘new build’. For instance, if I purchase a home that has changed hands three times within a year of code compliance being issued, can this really be said to be a new build? Presumably ‘yes’; however, this point is not expressly addressed in the legislation. Submissions on the consultation document closed 12 July 2021. For now, it is simply a matter of waiting to see how these laws will be further clarified.
Where to from here?
Our team can assist if you need advice on how your intended purchase will be treated under the new law.