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Surprise tax changes for residential investment property

Now that we have had time to reflect on the impact of these announcements, we thought you would appreciate our view on things going forward.

There has already been some great commentary written about the changes and we have included some links for you to review.

The main five points however:

  1. Nearly $4 Billion to be spent on infrastructure to accelerate housing supply. This is very welcome, if massively overdue.  We will see how long this takes to become a reality, given our sad experience around Kiwi Build promises.
  2. First home buyer price and income limits adjusted upwards. No logical moving benchmark system so they will be out of date very soon and it appears hardly worth at all in Auckland and Wellington right now, as highlighted by Heather du Plessis-Allan
    Heather du Plessis-Allan
  3. Extending the Bright Line Test (let’s call it ‘Capital Gains’ Tax) is pushed out to 10 years (except for new builds which remains at 5 years)
  4. Amending the main home exclusion which would require tax to be paid on gains made for any period the property was not used as the owner’s main home.
  5. Removing interest tax deductions on existing loans used for residential properties starting from 1st October 2021 (for property acquired from 27th March). For existing properties, to be phased in over 4 years.  Possible exemption for newly built homes (see IRD Link).
    IRD fact sheet

Our first advice is don’t rush into any quick decisions around exiting the rental market.  None of these changes (with the possible exception of #1) helps the supply of rental property and will likely only drive up rents.  Also, it is important to note the interest deduction changes are yet to become law and requires consultation with IRD and Treasury.

Secondly, the interest non-deductibility will be phased in over 4 years and the actual effect, expressed as an increase in your current interest costs is really 1%-1.5% per annum. Prior to this change, if interest rates went up by 1.5% wouldn’t you still have invested in property? Plus, it is important to note the four-year spread here.

Thirdly, the press release from the Beehive read like this:

“The full removal of interest deductibility from October 2021 will apply to all investment properties other than potentially new builds-purchased on or after 27th March”.

Those investing with little or no debt will not care one bit about deductibility, but they will enjoy much higher rents as investors universally look to obtain maximum rentals to off-set the tax costs inflicted.

It is hard to see how any of these changes will benefit those people who currently are unable to afford rents even in smaller NZ towns and we have seen those news articles recently picking out some unfortunate homeless people as an example of the “housing crisis” and justification for last week’s changes.

The real solution is from massive central government involvement in urgently needed public housing such as the Labour Government achieved in the 1930s.

Then, back that up with the infrastructure to support those rapidly growing areas such as the Selwyn District in Canterbury and then you will be some way to solving the problem. At least it seems we might get some of the infrastructure support needed.

Just financially killing off the average ‘Mum and Dad’ hard worker/saver who are doing something for their retirement, in the form of one or two rentals, is not the answer and will have the reverse effect on supply and conversely push up rents.

We await more clarity around new builds as soon as possible and remind you all that the interest non-deductibility matter is a government statement not yet backed up with legislation…..we will watch with much “interest”.

 

 

 

Amanda Lochhead, Associate Partner from Findex Accountants, shared the following with Iron Bridge:

“We expect the government will receive extremely robust feedback during the consultation period, and it appears the “new build” tax incentives are a potential silver lining to what is a drastic tax policy change for existing housing stock.

As with any financial decision, you need to ensure you have all relevant information at hand to make a well-informed choice after considering many factors. Ultimately taxation will form one aspect of that decision, but it really is important to seek good advice which takes your personal circumstances and overall financial goals into account”