Property and Tax update 2021
On 23 March 2021, changes to tax rules for investment properties took investors by surprise. There has been widespread commentary with more to come as the detail unfolds.
- The bright-line test has been extended from 5 to 10 years for properties purchased on or after 27 March 2021
- The current exemption for the main home changes for properties acquired on or after 27 March 2021, making them subject to a ‘change of use’ rule
- From 1 October 2021 property owners will not be able to claim interest on residential investment property acquired on or after 27 March 2021, and interest deductions on borrowings for residential investment property acquired before 27 March 2021 will be phased out over the next four income years.
Different rules apply for different scenarios:
- For properties purchased from 27 March 2021, the bright-line test period is 10 years.
- If you already own a rental, and, the old rules apply:
- a 5-year bright-line test if you purchased the property on or after 29 March 2018, or
- a 2-year bright-line if you purchased the property from 1 October 2015.
- If it’s a new build, the proposal is that it will be subject to a 5 year bright-line test.
- If you’re in the middle of buying a residential rental property, it’s more complex. Generally, if you entered into a binding contract to purchase a property before 27 March, you are within the old rules and the 5-year bright-line test applies. However, depending on variables around when the offer is accepted or the exchange and timing of counter offers, the 10-year bright-line test may apply. Talk to us if you’re in doubt.
‘Change of use’ and the main home exemption
Under the current rules, if the property has been used as the person’s main home for over half of the relevant bright-line period, there is a complete exemption from tax under the bright-line test. Under the proposed changes, properties acquired on or after 27 March 2021 will be subject to a ‘change of use’ rule. If a property switches from being the owner’s main home for more than 12 months, then a proportion of the sale profits of a property sold during the bright line period will be taxed, based on the ratio of time that the property was and wasn’t used as the main home. The existing main home exemption rules continue to apply for residential property acquired on or after 29 March 2018 and before 27 March 2021.
The rules are graduated depending on when the property is acquired:
- for residential property acquired on or after 27 March 2021, taxpayers won’t be able to claim deductions for interest from 1 October 2021
- for properties acquired before 27 March 2021, interest on loans can still be claimed as an expense. From 1 October 2021 – 31 March 2023, the amount claimable will be reduced to 75%, reducing by 25% each following income year, until it is phased out completely from 1 April 2025.
The Government is also consulting on whether an exemption for new builds acquired as residential investment property should apply. Property developers and builders who build properties to sell will still be able to claim their interest expenses.
Residential properties used to provide short-stay accommodation, where the owner does not live in the property, will be subject to the bright-line test and cannot be excluded as business premises.
Some of the proposals are subject to consultation. If you have the opportunity to comment, please make it clear how the changes affect you. If you own a residential rental or one used for short-stay accommodation, or if you are considering buying a second property, please contact us, to discuss the tax implications.
6 things you should know before filing your EOY tax – post COVID-19
Ticking items off your end-of-year tax checklist this month?
Make sure you consider the business support and tax relief measures introduced because of COVID-19 so you can sail as smoothly as possible into the new financial year.
There are some things you may not be used to thinking about when you prep for end of tax year:
- New rules to keep cash flowing – If money is a bit tight as the financial year draws to a close, here are four tax measures focused on providing and enabling cashflow that you might like to consider:
- The tax loss carry-back rule, which means if you’re expecting a tax loss for the year ended 31 March 2021, you might be eligible for a refund of provisional tax previously paid for the 2020 year.
- If your cashflow has been significantly impacted by the economic effects of COVID-19, you may be able to apply for relief from use of money interest and penalties, or enter into an instalment arrangement for payments due to Inland Revenue. Inland Revenue’s ability to remit use of money interest in such circumstances applies to tax payments due up until 25 March 2022.
- Keeping an eye on tax losses, as the Government have announced plans to introduce a same or similar business test that allows tax losses to be carried forward. This will become useful if you’re wanting to raise capital for your business in the future.
- Consider the Small Business Cashflow (Loan) Scheme being offered by the Government through Inland Revenue where certain conditions are met. This provides loans of up to $10,000 (dependent on the number of employees) with an interest rate of 3%, with no interest applying if the loan is repaid within 2 years.
- Asset threshold lowering – Put aside time to review your asset expenditure. Identify any assets (valued up to $5,000) that you need and buy them before 17 March 2021. This way, you’ll be able to claim an immediate deduction for these assets under the low-value asset write-off as the threshold drops from $5,000 to $1,000 on 17 March 2021. The temporary $5,000 threshold was a concession as a result of the COVID-19 relief measures introduced, and from the 17 March 2021 the $1,000 threshold is an increase from the $500 amount that was previously in place prior to 2020. It’s also a good time to ensure records are up to date on any commercial buildings as depreciation for tax purposes is available on commercial buildings for the year ended 31 March 2021.
- Earn over $180,000 a year? – If you’re one of the 75,000 Kiwis impacted by the new 39% tax rate, review your business and investment structure with us before 1 April 2021. The marginal tax change, rushed through last December to help pay for the COVID-19 recovery, applies to all employment income over $180,000 a year. It includes extra pay earned in the course of employment, such as bonuses, back pay, redundancy, and retirement payments. It is timely to consider such payments in relation to the 2021 year, as well as reviewing dividend payments.
- Keeping subsidy records crucial – While COVID-19 related wage and leave subsidies are non-taxable, keep accurate records of any subsidy you received and which staff member it was paid to, in case the Ministry of Social Development asks to review your records down the track.
- R&D loss tax credit – Start-up companies are able to cash-out their tax losses arising from eligible research and development (R&D) expenditure, and avoid carrying the losses through to the next income year. The credit can only be for:
- eligible R&D business expenditure
- up to 28% of your tax losses from R&D activity
- companies that are tax residents in New Zealand
- dates on or after 1 April 2015. The rules around R&D expenditure are detailed and eligible R&D expenditure will require approval from Inland Revenue. So if you’re looking to claim under these rules, you will need to start looking at this sooner rather than later, and keeping records of such expenditure as it occurs.
- Staff reimbursements and allowances – Make sure you have a good record of any reimbursements and allowances paid to employees for expenditures – generally and in account of new COVID-19 related Working from Home (WFM) tax changes. Remember:
- For telecommunications devices and plans, staff reimbursements are tax exempt up to $5 per week. If reimbursement is above this amount, the exempt amount is 25% if the device or plan is used partly, 75% if used mainly, or 100% if used exclusively for employment purposes.
- WFH payments claimed between 17 March and 17 September 2021 allow an additional $15 per week, per employee, to be exempt income for other WFH expenditure.
- A tax-exempt payment for use of furniture or equipment when WFH to reimburse the depreciation of the item. The payment will typically be for the cost of the asset and the payment will still be deductible to the employer. Note the low-value asset threshold of $5,000 applying between 17 March 2020 to 17 March 2021 will apply here.