Summary of new proposals around investment in residential rentals

The government has announced the following changes with the intention to curb the price rise in the housing market.

• Extend the bright-line test from 5 years to 10 years, and some other changes for the main home exemption
• Remove interest deductions for residential rentals
• Invest $3.8 billion into a Housing Acceleration Fund
• Loosen the income and price caps for first home buyers accessing government assistance

The key points in each of the above proposals are: 
Bright line test

1. Extend bright-line test from 5 years to 10 years on existing properties (on which an offer has been made on or before 23 Mar 2021)
2. Keep bright-line test to 5 years for NEW builds & those on which the offer has been made before 23 Mar 2021 but cannot be withdrawn before 27 Mar 2021
3. Main home exemption modified to apply apportionment calculation where the property was not the main home for more than 12 months. 

Interest deductibility

1. For rental property purchased ON or AFTER 27 Mar 2021, interest expense is not deductible on w.e.f 1 Oct 2021
2. For rental property purchased BEFORE 27 Mar 2021, interest expense is not deductible on w.e.f 1 Apr 2026 (F27). From now to then, interest deduction will be available on a "reducing basis" (ie 100%, 75%, 50%, 25%, 0%) in F22, F23, F24, F25 and F26 respectively!
3. Not applicable to property developers or where residential property is supplied as security for a business loan
4. Government is yet to decide about interest expense on new build residential rentals and some other detail. We will advise when these become available

Other non-tax measures

1. From 1 Apr 2021 Annual income cap for government assistance goes from $85k to $130k for singles and $95k to $150k for couples.
2. From 1 April 2021 House price cap increases depending on location and whether it’s a new build.
3. $3.8b Housing Acceleration Fund set up to fund infrastructure to fast track further development.

Other issues

1. We don't know yet how this will impact dual use properties (both residential and commercial)

Potential economic impact

1. Faster increase in rental expense to partially offset additional costs to the landlord and readjusting to the new demand and supply equation for rental assets
2. Incentives to new builds will increase supply of rental assets but over time
3. Mum & dad landlords likely to exit the market further reducing the supply of rental assets.
4. If the legislation is passed, NZ will be heading towards a situation like UK, Germany and few other European countries (where interest in residential rental assets are not deductible) where most rental assets are mostly consolidated in the hands of banks, insurance companies, local city councils and super rich landlords.
5. Overall investment is expected to redirect to commercial rental assets, shares of NZ & AU listed companies and businesses)
6. Rising of financial literacy over a period of time as those non property assets will REQUIRE active management unlike rental assets which are passive.
7. Increase in long term land banking as a hedge against inflation and an alternative to park funds instead of keeping in the bank. 

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To avoid making forced errors, we strongly recommend that you contact your tax advisor at Core Business Services Ltd around the tax consequences to your individual property once the final legislation is enacted.
 We will keep you appraised as new information comes to light.

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Disclaimer
The above publication discusses income tax issues generally and is not intended to be specific tax advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.