Reversion to a two-year bright-line test
The current 10-year and five-year bright-line tests for disposals of residential land are to be repealed and replaced by a two-year bright-line test. This would return the bright-line test to its original two-year period as first introduced in October 2015. The stated policy is to return the test to its original purpose of ensuring that speculators pay their fair share of tax on gains from property sales.
The new two-year bright-line test would take effect for sales of residential land where the “bright-line end date”, which is generally the date a binding contract for sale is entered into, occurs on or after 1 July 2024. For sales with a bright-line end date prior to 1 July 2024, the existing rules will continue to apply. The proposed rules will provide an incentive to defer sales of property until 1 July 2024. The relaxing of the bright-line period may reduce the lock-in effect associated with the five and 10-year bright-line periods, and it will be interesting to see whether more properties enter the market as a result.
The main home exclusion will be restored to its original formulation. The exclusion will apply if land has been used predominantly (more than 50% of the land area), for most of the time the person owned the land (more than 50% of the period), for a dwelling that was the person’s main home. In addition, its original formulation will be modified so that the period when a dwelling is being constructed is ignored in determining whether the land has been used as a main home for the period.
Rollover relief rules will be significantly extended. All transfers between associated persons will benefit from rollover relief, provided that they have been associated for at least two years prior to the transfer. Rollover relief can only be claimed for a property under the proposed associated persons provision once in any two-year period. The rationale for the extension of rollover relief is that the bright-line test is directed at property speculation, and transactions between associated persons are generally not speculative in nature. The relief will add flexibility to family arrangements concerning residential property, including family co-ownership arrangements, which became complicated under the longer bright-line tests.
Interest deductibility
Rules were introduced in 2021 to deny a deduction for interest incurred for residential investment properties. For property acquired on or after 27 March 2021, interest deductions have been denied in full since 1 October 2021. Properties acquired before 27 March 2021 and for loans drawn down before 27 March 2021 have been subject to the phasing out of interest deductibility.
The amendment paper proposes to phase back in interest deductions for all taxpayers, regardless of when they acquired their residential investment property or drew down on their relevant debt facilities.
Interest deductibility is proposed to be phased back in on the following basis:
|
Period that interest is incurred |
Percentage of interest deductions allowed |
|
1 April 2024 to 31 March 2025 |
80% |
|
1 April 2025 onwards |
100% |
Depreciation on commercial buildings
The depreciation rate for all commercial buildings with an estimated useful life of 50 years or more is proposed to be set at 0% for the 2024-25 and later income years. This returns the depreciation rate on commercial buildings to its pre-2020 settings.
In determining whether a building has an estimated useful life of 50 years or more, its estimated useful life will be determined on a whole-of-life rather than remaining-life basis.
The 0% rate means that commercial buildings will remain depreciable property. As a result, previous depreciation deductions claimed may be clawed back when the building is ultimately disposed of.
The definition of “building” is to be amended to exclude commercial fit-out. In essence, the depreciation treatment of commercial fit-out would not change – it would continue to be depreciated separately from the building itself. Rules previously in effect when the depreciation rate for commercial buildings was last set at 0% are set to be re-introduced, with some modifications, to allow for the depreciation of commercial fit-out.
Disposals of trading stock at below market value
Under current law, where a business disposes of trading stock for less than market value, the business is deemed to have derived income equal to the market value of the trading stock on the date of disposal.
An officials' issues paper published in July 2023 noted the potential overreach of the deemed market value rule for trading stock.
The amendment paper proposes to address this overreach, while addressing integrity concerns, by limiting the rule to the following instances:
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- Where trading stock is disposed of to an associated person.
- Where a person disposes of trading stock to themselves for their own use or consumption.
- Where trading stock is not disposed of in the course of carrying on a business for the purpose of deriving assessable income or excluded income, or a combination of both. The commentary to the amendment paper notes that this may include where a donation is made for promotional or marketing purposes.
The proposed amendments would also ensure that the deemed market value rule for trading stock does not apply to disposals of trading stock to a donee organisation outside the course of carrying on a business. This may remove any tax disincentive that businesses may previously have faced when seeking to donate trading stock to donee organisations.
Offshore gambling duty
A 12% offshore gambling duty is proposed to be introduced on offshore gambling profits arising for offshore gambling operators on or after 1 July 2024. The effect of the offshore gambling duty, alongside the existing GST remote services rules is to ensure that offshore gambling operators pay an overall tax rate of about 25% on gross betting revenues.
Offshore gambling duty applies to GST-registered persons located outside New Zealand, to the extent that they make supplies of remote gambling services to New Zealand residents.
The offshore gambling duty rules have been designed to align with the existing GST remote services rules, to allow existing systems and calculations for GST to be adapted to apply the offshore gambling duty.
Offshore gambling duty is dutiable on offshore gambling profits. Offshore gambling profits exclude amounts from betting on sports and racing because of an existing requirement to pay a 10% “point of consumption charge” to the Department of Internal Affairs on those amounts.
Offshore gambling operators who only supply sports and/or racing bets to New Zealand residents for which point of consumption charges are paid, will not have any liability for offshore gambling duty. However, they will still need to register for offshore gambling duty and file nil returns for the relevant return periods (along with paying any GST under the current remote service rules).
The amendment paper makes no mention of the interaction between the new duty and double tax agreements.
Transitional rule for certain listed services
Starting 1 April 2024, operators of electronic marketplaces will be required to return GST on supplies of listed services such as accommodation services which are not otherwise exempt for GST purposes. An operator of an electronic marketplace will be liable to return GST where the time of supply is triggered on or after 1 April 2024. In some cases, the GST will instead be payable by a “listed intermediary” which acts on behalf of various hosts and lists properties on their behalf.
A transitional issue may arise where accommodation bookings take place before 1 April 2024 for a host who is not GST-registered. In this case, the price of the accommodation would likely have been set on the assumption that GST did not apply. Where the time of supply is triggered for an earlier booking on or after 1 April 2024, the operator of the electronic marketplace would have a GST liability for the supply, despite the price of the accommodation not being set with GST in mind. Where time of supply was triggered before 1 April 2024 then there is no GST liability so these transitional rules are not required.
An optional transitional rule is proposed to allow operators to relieve themselves of their GST liability for supplies of accommodation services where, among certain other requirements, the contract for the services was entered into before 1 April 2024. Where the transitional rule is applied, any GST liability would remain with the host, who would only be liable to account for GST if they are GST-registered.
Special rules will apply where the host has notified the electronic marketplace that they are GST-registered. The new transitional rule can only be applied where the operator of the electronic marketplace notifies the GST-registered host within a reasonable timeframe that they will not be liable for GST, and that the liability will remain with the host.
Double tax agreement source rule
An amendment is proposed to broaden the reference from “technical services fees” to “fees for technical, management or similar services” to ensure that a broader category of fees is excluded from the double tax agreement source rule in order to mitigate its current overreach.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.