New Zealand has published the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022, which received royal assent (was enacted) on 30 March 2022. As explained by Inland Revenue, the Act includes measures aimed at limiting the deductibility of interest incurred for residential property investments and measures updating the residential property bright-line test. The Act also contains a range of improvements and maintenance measures to ensure the smooth functioning of the tax system, including to:
- modernise the GST invoicing rules;
- introduce specific rules for the GST treatment of crypto assets;
- set penalties for the sale and acquisition of sales suppression software; and
- set the annual income tax rates for the 2021–22 tax year.
Regarding income tax rates, the standard tax rate for companies is maintained at 28% and the personal income tax brackets and rates are maintained as follows:
- up to NZD 14,000 - 10.5%
- NZD 14,001 to 48,000 - 17.5%
- NZD 48,001 – $70,000 - 30.0%
- NZD 70,001 – $180,000 - 33.0%
- NZD 180,001 and above - 39.0%
With regard to the deductibility of interest incurred for residential property investments and measures updating the residential property bright-line test, Inland revenue has published a special report to explain the changes, summarized as follows:
The interest limitation rules are part of the Government's initiatives to address housing affordability. The aim of the reform is to reduce investor demand for residential property. Many landlords invest in residential property expecting a large capital gain when they sell the property. The tax system previously allowed landlords to deduct interest expenditure for residential rental property, even if gains made on sale of the property were not taxed. The new interest limitation rules have limited the deductibility of interest expenses incurred by property investors from 1 October 2021. The extent of the limitation depends on whether the property was acquired on or after 27 March 2021.
Summary of key features:
- Disallowed residential property subject to interest limitation: Property that is commonly and foreseeably used to provide residential accommodation on a long-term basis and is (or could be) used as an owner-occupied residence is subject to the interest limitation rules. This property is referred to as disallowed residential property (DRP). From 1 October 2021, deductions are denied for interest incurred in deriving income from DRP acquired on or after 27 March 2021 (subject to certain exceptions).
- Application to certain companies: The provision allowing for an automatic deduction of interest for most companies is overridden for certain close companies and companies whose assets are primarily DRP. These companies are now required to trace the use of their borrowed funds and are denied deductions for interest incurred on borrowings used to derive income from DRP.
- Excepted residential land excluded from DRP: Certain types of property not suitable for long-term residential accommodation, and which cannot be substituted for such, are excluded from DRP and not subject to the interest limitation rules.
- Exemptions: Land businesses, developments and new builds are exempt from the interest limitation rules. New builds are exempt for a period of 20 years from their date of completion.
- Grandparented residential interest subject to progressive limitation: For DRP acquired before 27 March 2021, deductions for interest are being progressively denied over the transition period between 1 October 2021 and 31 March 2025. DRP owners are required to trace the use of their borrowed funds to ensure the limitation is applied to interest incurred on borrowings used to derive income from the DRP. The current tracing approach applies for loans used to fund DRP – that is, tracing funds borrowed to taxable and non-taxable purposes to determine the deductibility of interest on a loan (unless the borrower is a company). This includes borrowings to fund expenses incurred in deriving income from the DRP, for example, interest on borrowings to pay a rental property's rates (although the deductibility of the underlying rates expenditure is not affected by the interest limitation rules).
- Rollover relief for transfers of DRP: Rollover relief is provided for certain transfers or disposals of DRP to ensure grandparented residential interest remains deductible throughout the full transition period between 1 October 2021 and 31 March 2025.
- Interest deductions on taxable sale of the DRP: Interest deductions are allowed on the taxable sale of the DRP.
- Interposed entities: Interposed entity rules ensure taxpayers cannot claim interest deductions for borrowings used to acquire DRP indirectly through interposed entities.
- Specific anti-avoidance rules: Specific anti-avoidance rules support the integrity of the interest limitation rules.
As well as introducing new interest limitation rules, several changes have been made to the bright-line rules for sales of residential land.
- 5-year new build bright-line test: Owners of new builds are subject to a 5-year bright-line period rather than the 10-year period.
- Amendment to main home exclusion: The portion of land attributable to the main home will generally not be taxed on disposal under either the 10-year or 5-year bright-line tests.
- Rollover relief: Limited extensions to rollover relief from the bright-line test are available for some common ownership change scenarios where economic ownership has not changed or is materially the same as it was before.