These changes would legislate most of the key promises made by the government during the election campaign in relation to buildings (all types) and online gambling, while also fixing rules around the disposal of trading stock. We discuss each item in turn: 

Interest Deductibility on Residential Rentals 

Interest deductibility on residential rentals was restricted with effect from the 2021 income year, in stages. For the year ended 31 March 2024, no interest deduction is permitted for post-2021 lending to acquire residential property, with a limit of 50% deductibility on pre-2021 lending (with some limited exceptions). Full interest deductibility will now be restored, but in two stages. For the year ended 31 March 2025, a deduction of 80% of interest paid in relation to residential rentals will be available. This will apply to both pre- and post-27 March 2021 lending. Any property that would have had 100% deductibility under the previous rules (e.g. new builds) will continue to have this for the year ended 31 March 2025 under the new rules. 

For the year ended 31 March 2026, a full interest deduction will be available. 

Anyone who had their interest deduction deferred under the previous interest limitation rules (for example, where a property would be subject to the bright-line test and an interest deduction would be available on sale) will still be able to take advantage of these rules. 

Two-Year Bright-line 

Residential property disposals from 1 July 2024 onwards will be subject to a two-year bright-line test. Generally, this means any residential property that is the subject of a binding contract for sale entered into on or after 1 July 2024 will not have any gain taxed if the property were held for more than two years. There have also been some amendments to the main home exclusion, as well as expanded rollover relief provided. Note if the property is taxable on sale under other rules (e.g. for property developers) those tax rules will still apply. 

Main home exclusion 

The most recent series of bright-line changes had included complex changes to the main home exclusion. If enacted, these amendments will see these changes removed and the previous usage test reinstated. That is, for a property to be the main home, at least half of it must be used as the main home for at least half the period of ownership. 

In addition, when determining whether the land was used as the person’s main home for most of the bright-line period, construction periods will be ignored. So, for example, someone purchases a bare section of land, it lies vacant for three months, then it takes thirteen months to construct, and then the person only occupies the house as their main home for six months. In that case the period considered would be the vacant three months and the six months of occupation only. As the occupation period was more than 50% of the total period counted for the test, the main home exemption would apply to make any gain exempt under the bright-line test. 

Rollover relief 

It is planned to extend rollover relief to cover all transfers between most associated persons (the exception being persons associated under the tripartite test), provided they have been associated for at least two years prior to the transfer or a transfer to a trust where all beneficiaries are persons who have been associated with the transferor for at least two years, with exceptions for infants, recent marriages and adoptions and charities. This should make restructuring family affairs much easier, as well as making it easier for parents to help their children into a home. 

Rollover relief under these rules will only be available once in any two-year period. 

If you are planning to sell any residential property potentially subject to the five- or 10-year bright-line in the coming months, please contact your Baker Tilly Staples Rodway advisor as the bright-line end date can vary depending on the circumstances. 

If you are planning any sort of restructuring involving residential property potentially subject to bright-line, please contact your Baker Tilly Staples Rodway advisor, as rollover relief can have limited scope. 

The End of Depreciation on Buildings 

From 1 April 2024, a depreciation deduction will no longer be available in relation to commercial and industrial buildings and therefore the status quo, which existed from 2011 through to 2020, will be restored. This will include the 15% provision for fit-out for buildings acquired on or before the 2010-11 income year. Those who acquired buildings post 1 April 2020 and failed to separate out building fit-out are directed by the commentary to seek an amendment to their income tax returns for the years in which building depreciation existed. 

Note, this might have an impact on deferred tax under financial statements prepared using NZ IAS. 

Disposals of Trading Stock at Below-Market Value 

For many decades, the Income Tax Act has contained a rule that meant any disposal of trading stock at below-market value would result in the business deriving income equal to the market value of the trading stock. This rule was particularly disliked by businesses who wanted to donate trading stock to worthy causes. 

Planned amendments would mean this rule would only be applicable for associated person disposals, trading stock taken for private use and trading stock not disposed of in the course of carrying on a business (with the exception of trading stock donated to a charity). 

Offshore Gambling Duty 

Under the existing GST rules for non-resident suppliers of remote gambling to New Zealand residents, those suppliers are required to register and account for GST on the net gambling income. Offshore Gambling Duty, at 12% of profits, would be applicable from 1 July 2024 for GST-registered persons located outside of New Zealand to the extent they make supplies of remote gambling services to New Zealand residents. The total overall rate applying to those gambling profits would therefore be just over 25%. 

Comment 

While these changes were clearly signalled, it has been unfortunate that it did not go through the usual consultation process. Unexpected consequences of such law changes can often be discovered through that process, meaning later amendments aren’t necessary. 

The expansion of rollover relief with respect of the bright-line test is particularly welcoming. We have come across too many scenarios where normal family transactions have been subject to the bright-line test, resulting in unfair tax bills – a good example of this has been parents who have helped their children into their first home. 

We also welcome the change in rules regarding the disposals of trading stock at below-market value. It has always been frustrating that businesses who donate trading stock to do good for the community (e.g. donating food to a food bank) would face a tax consequence for doing the right thing. 

If you have any questions about how these changes could impact on you, please contact your Baker Tilly Staples Rodway advisor.