NZ Government urged not to rush housing crisis tax policy

Content Summary

Bill Leung | August 2021

This article was current at the time of publication.

Tax policy delivered in haste could have unintended consequences, according to CPA Australia’s response to the New Zealand Government’s consultation document, Design of the interest limitation rule and additional bright-line rules

New tax rules

The document proposes tax rules on removing interest deduction from residential investment property and extending the bright-line test to tax gains on the sale of investment properties. 

For residential property acquired on or after 27 March 2021, the main changes are:

  • Investors will no longer be able to deduct interest costs from 1 October 2021. For properties acquired before then, the interest deduction will be progressively phased out over four years from 1 October 2021.
  • Extending the bright-line test from five to 10 years and a five-year bright-line test for new builds.

Tackling the housing crisis

The government’s intent is to use tax policy, specifically removing the deductibility of residential property interest expenses, to de-escalate the housing affordability crisis. 

It perceives the availability of interest deductions for residential investment property as a tax loophole that fuels rising house prices. 

It also proposes to extend the bright-line test to tax those who invest in residential investment properties for capital gain.  

CPA Australia’s July submission was developed with the assistance of our NZ Member Tax Committee, who commended the government for tackling housing affordability. 

However, we urged the government to take more time to consider the impact and merits of using tax policy to improve housing affordability. 

The concern is that proposed changes are likely to create unintended and undesirable outcomes. 

The changes will also impact almost every aspect of the housing market and tax system. 

What is more important is that ultimately this tax policy reform may not achieve what we all want – more land for housing and more affordable housing.

The submission proposes that structural reform in improving planning laws and the removal of restrictions to liberate greenfield land would provide a more sensible and enduring solution.

There is a significant risk that an overcomplicated approach – filled with exemptions, carve-outs and grandfathering clauses – will create further tax issues down the track, placing enormous strain on the Inland Revenue Department (IRD) and other regulatory authorities to police compliance with the new rules.

The submission emphasises that the government should have better utilised the Generic Tax Policy Process on its proposed rules, including consideration of the views of the Treasury and IRD as well as review by the Finance and Expenditure Committee (FEC) to allow sufficient time and proper consideration to analyse tax, fiscal and economic impacts and ensure the proposed tax rules will achieve the desired effect.

Many tax questions are raised in the consultation document, including the treatment of grandfathering clauses for properties bought before the government’s announcement, distinguishing between tenants residing in the main residence or secondary dwelling on a property and providing carve-outs for employee, student and short-stay accommodations. 

Rules difficult to navigate

CPA Australia holds the view that if the proposed rules are implemented in their current form, businesses, investors and many property owners will face difficulties navigating them. 

We anticipate that the changes will create more tax uncertainties, be excessively complex and increase compliance costs.  

Should the government choose to proceed, the submission includes our responses to the questions it raised in its consultation document. 

The focus of our feedback is to improve the application of the current proposals. In particular, we highlight the need to allow taxpayers to use accounting methods that are most reasonable for them, the ability to use tax book values when determining their obligations and the challenges for many taxpayers in understanding the record-keeping requirements and tax obligations.

Given the proposals will have significant and broad-ranging tax consequences for many New Zealanders, our New Zealand members will play an essential role in advising property investors and others on their tax and financial impact.