Residential Property Tax Changes: More Questions

The 143-page discussion document included design proposals for the restrictions on interest deductibility and changes to the bright-line rule.

On 26 July 2021, Inland Revenue released a set of 73 questions and answers (Q&As) in relation to the consultation topics.

Both the discussion document and the Q&As revealed challenges in applying the proposed rules in a coherent and consistent manner, particularly in relation to the “new build” concept.

Consider the following extracted from the Q&A:

“Q39. I bought residential land in 2019 and added a new build to the land in 2022, what bright-line test applies to me?

Which bright-line test applies depends on when the original plot of land was acquired, even if a new build is later added to the land or the land is subdivided. The previous five-year bright-line test would apply to land acquired in 2019, not the five-year new build bright-line test.”

 “Q40. I bought a property in May 2021 that I am renting out. It is on a large section and I want to add a new build to the land. Would the new build bright-line test apply to my entire section?

We propose that only the portion of the land attributable to the new build would be subject to the five-year new build bright-line test. Existing tax principles for apportionment would apply to determine the amount of gains taxed on sale.”

Suppose the facts in Q39 changed such that the residential land was acquired in 2022 and the new build added in 2024. If the answer presented above were applied (apply the bright-line rule at the time of original acquisition – i.e. 10 years, notwithstanding a subsequent new build), this would appear to render the new build bright-line rules invalid, which appears contrary to the stated policy intent of increasing housing supply.

The answer to Q40 raises the potential issue of a taxpayer altering investment decisions in a manner contrary to policy intent. It would appear from this answer that adding a new build and demolishing an existing build on a piece of land (which would not result in a net increase in housing supply) could potentially be taxed more favourably at point of sale compared to adding a new build and keeping the existing build (which would result in a net increase in housing supply). 

Another item in the Q&A, also raised in submissions on the original discussion document, is the treatment of uninhabitable dwellings renovated to standard (which would increase housing stock), which the Government previously indicated would likely not qualify for the new build exemption, although the matter was open to consultation.

It is important to note that while no legislation has yet been released, property investors will need to consider the changing landscape in order to make efficient investment decisions.

Tax partners Ryan Ehlers and Mike Turner will be providing a briefing for property investors next week regarding the proposed changes. Join us on Facebook Live – Wednesday 4 August at 11 am.