Individual tax implications - Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill

Welcome to My Tax, our inaugural quarterly newsletter by our People Services team. Our aim is to share key tax changes of interest to individual taxpayers so you know what might be impacting you now or in the future.

September was a busy month with the introduction of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill. This was a large tax Bill covering a broad range of topics which we cover summarise below.

A number of changes have been proposed in respect of property including:

Bright-line rules

• Clarification that the main home exemption can still be applied where the construction of a property exceeds 12 months.
• No reduction in taxable income under the bright-line rules will arise where the property has been used as a main home but the taxpayer is not eligible to use the main home exemption (for example, because there is a pattern of repeated buying and selling).
• The legislation will also be clarified to provide that the main home exemption can continue to apply even if there are multiple periods, each of less than 12 months, where the property was not used as a main home.
• The changes to the bright-line rules are intended to apply to property acquired on or after 27 March 2021. 

Interest limitation

• From 1 October 2021, interest deductions will be phased out on borrowings acquired before 27 March 2021 or cease completely for borrowing incurred on or after 27 March 2021.
• New builds are excluded from the interest limitation rules for a maximum period of 20 years. This is regardless of who the owner of the property is.
• A new build is defined as a residence receiving its code of compliance on or after 27 March 2020.
• Close companies and residential land rich companies will be subject to the interest limitation rules.
• There is some rollover relief available when a property transfer occurs but there is no change in the economic ownership of the property. For example, when a property is transferred to a family trust. However, the relief is limited and will not apply in all circumstances.

Foreign mortgages

• Where taxpayers have a foreign mortgage over a rental property, the foreign currency gains that arise on the mortgage will now be treated as residential property income (rather than as interest income) and can now be offset against rental property deductions or carried forward ring fenced losses. 

The tax treatment of crypto assets has been uncertain given the income tax legislation does not currently contemplate these assets. Particular uncertainties exist with regarding the application of the financial arrangement rules and GST to crypto assets.

To address these uncertainties, a definition of crypto assets has been proposed. Crypto assets which satisfy this definition will then generally be excluded from the financial arrangement and GST regimes. This is a taxpayer friendly change and will reduce the tax complexity associated with these assets.

The changes will apply from 1 January 2009, being the date that Bitcoin was launched.

Currently, a cap exists when mixed use assets are disposed of by a GST registered person (a common example of a mixed use asset is a holiday home used both privately and for holiday lets). The deduction that can currently be claimed is capped at the GST portion of the acquisition price of the asset. The removal of this cap means that assets such as land which typically increase in value are not overtaxed at disposal. 

Inland Revenue have released a revised list of approved offshore charities. Donations to offshore charities are not eligible for a donation rebate unless they are included on the Inland Revenue approved list. 

The rate of ESCT contributions for past employees is proposed to be reduced from 39% to 33%. 

Currently, non-active estates are required to file income tax returns annually. The Bill proposes to remove this requirement and reduce the administration burden on trustees. The amendment will apply from 1 April 2022. 

The Bill introduces the ability for new provisional taxpayers to use tax pooling to assist with meeting their provisional tax obligations. This is a welcome change given the difficulties that can arise around accurately estimating taxable profits in the first year of operations.

With the increase in the top marginal tax rate to 39% from 1 April 2021, we recommend you confirm that your withholding tax rates are correct with your banks and share registries. This will help to prevent tax liabilities arising when your income tax return is lodged and make your tax compliance obligations easier to manage. 

PIE income now needs to be disclosed on an individual’s income tax return even where the PIR rate is correct. Like with RWT, we recommend you check your PIR rate is still appropriate for your circumstances and contact your fund provider if changes are required. Inland Revenue are also issuing letters in the coming months to taxpayers where they believe a different PIR rate should be applied. We recommend you check these letters carefully as the rates proposed may not be appropriate for your circumstances.  

If you would like to discuss how the above changes may apply to your personal circumstances, please feel free to contact us. 

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