Breaking News: Tax Reforms by the Coalition Government Now Law as of March 27, 2024!
In a significant move the coalition government has successfully passed its landmark tax legislation. The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill, receiving its third reading on March 27, 2024.
Finance Minister Nicola Willis expressed her enthusiasm for the bill's potential to fortify New Zealand's economic foundation: "The Taxation Bill will help place New Zealand on a more secure economic footing, improve outcomes for New Zealanders, and make our tax system fairer."
Interest deductibility:
Among the notable adjustments, the legislation will restore interest deductibility for residential investment properties. The key features of the proposed amendments are:
The ability to claim interest deductions will be phased back in with 80% of deductions allowed from 1 April 2024 to 31 March 2025 and 100% allowed from 1 April 2025 onwards.
Phasing back in of interest deductibility will be allowed for all taxpayers, whether they acquired their property, or drew down lending, before or after 27 March 2021.
The current rules determining who, and what types of land, the interest limitation rules apply to will continue to apply. Any taxpayers, or types of land, that are currently exempt from the interest limitation rules will continue to be exempt.
The interest limitation rules will be repealed from 1 April 2025 once all taxpayers are entitled to full deductibility.
The rules that allow taxpayers whose disposals of residential land are subject to tax to claim a deduction for interest that was denied under the interest limitation rules at the time the property is disposed of, will be retained.
The Bright-line test:
The Bill will reduce the bright-line test for residential property from five years to just two for disposals of residential land where the bright-line end date (generally the date a binding contract to sell is formed) occurs on or after 1 July 2024. The new 2-year bright-line test will apply if the bright-line end date is within two years of the bright-line start date.
Example 3:
Jonathan entered into a sale and purchase agreement to acquire residential land in late 2021 with the transfer being registered on the title on 5 January 2022. He used the land as a rental property. He enters into a sale and purchase agreement to sell the land on 20 June 2024. The current 10-year bright-line test will apply to tax the disposal of the land. The land was acquired after 21 March 2021, and the bright-line end date for the land (being the date the sale and purchase agreement was entered into), was prior to 1 July 2024.
Martin also acquired residential land with a bright-line start date on 5 January 2022, which he used as a rental property. He disposes of the land on 27 July 2024. Because the bright-line end date for the land is after 1 July 2024, the new 2-year bright-line test will apply. But because the bright-line end date is more than two years after the brightline start date, the disposal will not be taxable under the new 2-year bright-line test.
Depreciation deductions for commercial and industrial buildings
Furthermore, the Bill will eliminate depreciation deductions for commercial and industrial buildings - a policy reinstated by the previous government in response to the COVID-19 pandemic. These changes aim to encourage investment in residential properties, providing renters with more options and, as Willis notes, "put downward pressure on rents."
Kiwisaver contributions while on maternity leave
A particularly innovative aspect of the bill is its support for parents on paid parental leave. It allows for government contributions to KiwiSaver accounts, provided the parents continue making their contributions. "I am particularly delighted by this measure because it will ensure people’s KiwiSaver accounts continue to grow while they are on parental leave and will benefit women who typically retire with smaller savings nest eggs than men," Willis remarked, highlighting the gender-sensitive approach of the reforms.
Taxation of Trusts
Revenue Minister Simon Watts said the bill also aligns the trustee tax rate with the top personal tax rate of 39%. He stated "To avoid the over-taxation of lower-income trusts, a $10,000 de minimis has been introduced that means only around 13% of trusts in New Zealand are likely to be impacted by the change to the top rate."
Tax on multinationals
The legislation also participates in an OECD-led global tax initiative, enforcing a minimum tax rate of 15% on large multinationals, ensuring they contribute their fair share to the economies they operate in.
The Bill is expected to pass into law by April 1, 2024. To read the detailed Commentary click here.
