Political Change And Tax

by Anthony Appleton-Tattersall on Oct 25, 2023
Article appears under: Accounting and Tax

Political Change and Tax is a guest post from Anthony Appleton-Tattersall at AAT Accounting Solutions.

For any who are somehow blissfully unaware of the political system, we had an election recently.

The final results and precise makeup of our next government won’t be known for a few weeks yet, but preliminary results are a clear vote for political change. We will soon have a National-led government in coalition with ACT. If special votes go against them, they may need to consider a third party, most likely NZ First.

This is not a place for my personal political opinions, but professionally speaking I’m pleased with this result, and cautiously optimistic we might have a friendlier tax environment for the property sector for at least a few years. But what does this mean for property investors? 

Good News, Everyone! Tax Changes Expected…

Speaking ever conservatively, I first must caveat that until the law is written there can be no certainty what is going to happen. The following details announced intentions, and my thoughts and expectations on detail.

But things can change before they happen. Ever known a politician to fail to deliver their promises?

Change to Residential Interest Deductibility

This is the big one.

Under the current law, many residential property loans are only 50% deductible, halfway through the ‘phase out’. Some who raised loans after March 2021 have no deductibility at all. If no change is made, this drops to 25% on 1 April 2024, and 0% from 1 April 2025.

This essentially taxes imaginary profits that do not exist. This was appalling in and of itself, but mixed with a stagnant or falling property market and rapidly rising interest rates it has been an atrocity.

Under National’s proposed changes, the phase-out pauses at 50% for another year, rises to 75% on 1 April 2025, and 100% from 1 April 2026. Under ACT’s political change plan, it is back to 100% from 1 April 2024.

One element that is unclear as yet (I’ve been awaiting a response from National for weeks, but I guess they’ve been busy) is what happens to the debt that is presently 0% deductible. It is my expectation that this will jump to 50% from 1 April 2024 as well.

Either way, you’ll absolutely still need to be paying any Provisional Tax that has been calculated for FY24, and probably FY25. 

Change to Bright Line

Both National and ACT have promised to reduce the Bright Line from the current 5-10 years back to the 2 years as initially introduced in 2015.

National has indicated that they would like this change in place “by July 2024”, and that it will apply to tests which existed prior to that date. It is my expectation that there will be a seemingly random day (yet another I’ll need to keep track of; why are they never aligned with tax years?) where any existing bright lines drop to 2 years, essentially ending any that were ongoing before that point.

It is not likely that existing bright lines will be retrospectively reduced to 2 years, so any sale prior to the “change date” within an existing test period is likely to be caught. That is to say, think very carefully before selling property bought in 2021, now. Try to wait until after the details are clear.

Also, it’s essential to be aware that Bright Line is just one of several ways that capital gain on property can be taxed. Most notably, any property purchased with the intention to sell remains taxable not just for the bright line period but forever. Also, property traders will once again need to be considerate of the tainting provisions on newly purchased long term hold properties.

AirBnB GST Changes

News on this has been really quiet. Earlier this year the government scheduled a change in the GST treatment of properties rented out short term via online platforms such as AirBnB, which would reduce the net returns to non-GST-registered property owners by making the platform deduct an 8.5% portion of revenue as a GST-equivalence before paying the owner. Note this does not require unregistered owners to register for GST, and should have no effect at all on owners who are already GST registered as they already account for this.

This change will take effect 1 April 2024 unless reversed by the new government, which National pledged to do back in March 2023, but hasn’t said much about it since.

Residential Ringfencing

No change has been proposed in this area.

Losses generated in the operation of a residential rental activity are expected to continue to be ringfenced against future residential income. Note that these losses can be offset against taxable income from the sale of a residential property under Bright Line if applicable. 

Individuals and Trust Tax Rates

To the best of my understanding, the proposed increase of the Trust tax rate to 39% for next financial year (beginning April 2024 for most) is proceeding.

National has proposed adjusting the income tax rates from July 2024 to account for inflation since they were last raised more than 10 years ago.

• 10.5% Tax up to $15,600 (up from $14,000)
• 17.5% Tax up to $53,500 (up from $48,000)
• 30.0% Tax up to $78,100 (up from $70,000)
• 33.0% Tax up to $180,000 (no change)
• 39.0% Tax thereafter

For a single earner on $80,000+ this results in annual tax of $16,277.50 (down from $17,320 – a saving of $1,042.50)

Conclusions? Any Changes Required?

All in all, this political change is a good result for property investors, and probably for the wider property market. It’s not going to end the existing high interest rate pain, but it’s going to bring the way residential property is taxed closer to how everything else is, and it’s going to allow some investors to exit the market without huge tax bills.

In terms of changes required, nothing immediately stands out as urgent. But with the reduction in Bright Line and removal of Disallowed Residential Interest, it’s now once again possible to restructure your holdings without locking yourself in for a further 10 years. This creates opportunity for some who have been stuck for a while. It’s possible something more efficient exists for you.