New Zealand Government pushes ahead on housing tax policy

Content Summary

Bill Leung | November 2021

This article was current at the time of publication.

In September 2021 the New Zealand Government released draft legislative proposals to remove interest deductions from residential investment properties and extend the bright-line test to tax gains on their sale.

What are the changes now?

The government has reaffirmed the policy position reflected in its June discussion document

For properties acquired before 27 March 2021, interest deduction will be progressively phased out over four years from 1 October 2021 until 31 March 2025. 

A five-year bright-line test will be used for new builds and interest deduction will be available 20 years from when a code compliance certificate is issued. Exemptions include property developments, student accommodation and purpose-built rentals.

Is tax policy the right tool for the job?

As CPA Australia noted in August this year, the views of the Inland Revenue Department and Treasury are key in this process and we believe the proposed rules should first be reviewed using the Generic Tax Policy Process before being presented to the Finance and Expenditure Committee.

However, the government insists that extensive work has been undertaken, including the consultation which followed the March announcement.

We also do not agree that tax policy is an effective way to address rising house prices, which are determined by various factors. 

These include market competition by the entry of non-bank mortgage lenders, changing population and income demographics and a limited supply of greenfield land and new housing. 

COVID-19-related issues have also contributed. For example, the monetary policy of governments around the world to combat the global financial crisis and now the pandemic has led to a global trend of lowering central bank interest rates to zero or below. 

Quantitative easing by central banks providing world markets with a large supply of cheap money and currency devaluation have added to unprecedented real asset price growth.  

COVID-19 has accelerated working from home, meaning – for those with occupations that can take advantage of such flexibility – living in or close to major cities in New Zealand and Australia may no longer be a priority. 

Such demand-side changes (unrelated to tax policy) in the housing market will likely bring lasting changes to house prices as regional populations increase.

What does it all mean?

Without the grandfathering of property investments purchased before the March date, affected investors will struggle to keep their portfolios. Because their investment decisions were made before these tax changes, it will force many to sell. 

Phasing out mortgage interest deductions with a progressive 25 per cent reduction over the next four years is exceptionally harsh.

We believe the changes introduce significant complexity to tax legislation by creating different treatments for different forms of investments. 

In the long run, this will reduce the coherence and balance of the tax system and add significant advisory and compliance costs for investors.

In our view, the proposed tax measures remain inefficient and distortive. Any short-term gains this tax policy appears to contribute to curbing growth in New Zealand house prices will be on top of the dampening effect of COVID-19 and the recent interest rate hike on the economy. 

Bill Leung is CPA Australia’s Tax Technical Adviser.