New tax policies under fire again! Expert calls them ‘riddled with loopholes’! Should those loopholes be exploited?

If there are loopholes, should people exploit them? Let's look at the gaps in the policies that the Government still needs to close. 

Many people are deeply confused by the new tax policies. Most property owners say the Government's announced tax package still lacks many crucial details. Diana likewise identified the following areas of uncertainty:

 

01

Exactly who will be subject to the new policy removing interest deductibility, and how will this be determined?

 

02

How will investment properties and owner-occupied homes be distinguished?

 

03

How will family homes and new builds be defined?

Industry figures also say many details of the announced tax policies remain unclear, and the Government has given no firm timeframe for resolving these issues.

Responding to the questions, the Government recently said that the precise definitions and implementation of the new tax rules would need to be settled through consultation.

Diana said: ‘It is still unclear who will take part in the Government's proposed consultation or how long it will take. Once implemented, these policies will have a major impact on investors.’

New taxes——key changes for investors

 

01

The bright-line test, which taxes capital gains, will be extended from five years to ten years for existing homes, while remaining at five years for new builds. Gains on owner-owned homes that switch between personal and rental use may also fall within the bright-line test.

 

02

Mortgage interest on rental properties purchased after 27 March will no longer be tax-deductible, while existing interest deductibility will be phased out over four years. It is also worth noting that it remains unclear whether new builds will be exempt, as the Government did not make this clear when announcing the rules. This means landlords may still be able to deduct mortgage interest, depending on the definition of “new builds” used.

Nick Kearney, a property lawyer at Schnauer & Co, said: ‘All these uncertain “factors” make it difficult for us to advise clients.’

 

“Owner-occupied homes” definition creates a “loophole”

How should mixed residential and commercial properties be classified?

Under the new tax policies, owner-occupiers will be excluded from the bright-line test. However, if a home purchased after 27 March becomes the owner's main residence, or is rented out for more than 12 months at a time, the owner will pay income tax on a proportion of the profit, less standard deductions.

‘Previously, homeowners were only caught by the bright-line test if they rented out their homes for a total of 50% or more of the period they owned them,’ Diana said.

 

Former ADLS CEO Joanna Pidgeon said the new rule would make withholding tax returns more complicated and the forms would probably need to be redrafted.

Many homeowners use their own homes for mixed residential and commercial purposes. For example, some rent out rooms to tenants, student boarders or short-stay guests through Airbnb. These properties may have both commercial and residential components. Where a property combines commercial and residential uses, IRD will consider its principal use.

According to a report from interest.co.nz, the Government is still deciding whether interest deductions will be allowed for residential properties used as workplaces for commercial purposes.

Diana said alternative tax treatments for mixed-use properties could involve apportionment according to floor area or rental income generated by different properties, or a complete exemption. 

It is worth noting that the new rules exclude purely commercial properties.

 

“New builds” boundaries remain unclear

Industry: Government may face extensive documentary “conflicts”

 

To encourage development, the New Zealand Government has exempted new builds from the 10-year bright-line test. New builds currently remain subject to a 5-year test.

Pidgeon said: ‘When a new build is owned by an investor, it may be exempt from the interest deduction rules, but that has yet to be determined.’

Diana said: ‘“If” currently hangs over the actual definition of a “new build”. The Government will work out the precise definition in consultation with IRD and the property community over the coming months.’

But how will the new rules apply to investors who planned to buy and reached agreements two weeks before the Government's new policies took effect in month 3, on day 27? This deserves attention.

For example, if a buyer signed a binding sale and purchase agreement before 27 March, would the house yet to be built be classified as an ‘existing property’ for interest deduction purposes? Or would it be classified as a ‘new build’ and therefore subject to a 5-year bright-line test rather than the new 10-year rule? These questions remain unclear to us.

Tax adviser Terry Baucher said the Government could face extensive documentary ‘conflicts’ during consultation or hearings. He expected it might adopt a broader definition of ‘new build’, given that it was encouraging new development and construction.

 

5-year bright-line test compliance below 50％

The Government may struggle to collect tax under the bright-line test

 

Diana said the new tax rules, particularly the removal of interest deductions for residential property, had caused an uproar among investors and professionals.

Under the previous rules, residential investors could deduct loan interest when calculating taxable income, reducing their tax bills.

The Government calls this a loophole, but investors say it is no different from any other business claiming its costs.

Baucher said: ‘This is an unusual situation because investors use borrowing to obtain capital gains, but only the rental income component of their total return is taxed.’

Jenée Tibshraeny of interest.co.nz said: ‘Whatever the Government decides, it may struggle to collect tax under the bright-line test, because compliance with the five-year test is below 50%.’

Diana concluded that other provisions in the Income Tax Act 2007 can tax gains from selling land, including residential land, regardless of when the property was purchased. These include rules that speculators, land developers, dealers and other relevant parties must comply with. They still apply to properties bought to make capital gains, in which case those gains are taxable at any stage. The bright-line test may apply only when none of the other land-sale rules applies.