May 2023 Tax Bill amendment paper

Some key features to note:

• The interest deductibility phase-in will commence from 1 April 2024, regardless of your balance date. This means that for a December balance date taxpayer, for example, with grand-parented funding, the period from 1 January 2024 to 31 March 2024 will be subject to deductibility under the current rules (50%), and the period from 1 April 2024 to 31 December 2024 will be under the new rules (80%). In the following income year, the period from 1 January 2025 to 31 March 2025 will be subject to 80% interest deductibility with 100% interest deductibility from 1 April 2025.  
• Other existing exemptions from the interest limitation rules will continue to apply, including the land business exemption and the development exemption.
• Any interest deductions that have been denied to date can be carried forward and added to the cost base of the property to which it relates, if the property will be taxable on sale (e.g., under the bright-line test), but subject to loss ring-fencing rules.  

The key features of this change in the amendment paper are:

The current 10 (and 5) year bright-line tests for residential land will be replaced by a new 2 year bright-line test. The new test will apply if a person’s bright-line end date is within 2 years of their bright-line start date. For standard sales, the bright-line start date is when the transfer of land is registered with Land Information NZ. (Other start dates may apply in different circumstances – this is not a change from the current law). The bright-line end date is generally the date a binding agreement for sale and purchase is entered into (other end dates may apply where there is no sale agreement).

The new 2 year test will apply if the bright-line end date is on or after 1 July 2024. Practically, this will mean in most cases that if a binding contract for sale is entered into on or after 1 July 2024, the 2 year bright-line test will need to be considered, whereas if the contract is entered into on 30 June 2024 or earlier, the current 5 or 10 year bright-line tests will potentially be applicable.   

The “main home” exclusion from the bright-line test is also being changed. Currently, the main home exclusion is calculated based on the time that the property is used as the main home and the land area of such use. For example, if the property was used as a main home for 30% of the time, 70% of the bright-line gain will be taxable. From 1 July 2024, the exclusion will apply in full if for more than 50% of the time (and more than 50% by land area) the property has been used as the main home. The puts the main home exclusion criteria back to its original policy setting – i.e., the main home exclusion either applies or does not. The commentary also clarifies that the ‘more than 50% of time’ requirement does not need to be without interruption and construction periods can be excluded from the test.

Extended rollover relief is proposed for transfers of residential property subject to the bright-line test from 1 July 2024. (Rollover relief treats the recipient as acquiring the property for the transferor’s original cost and at their original acquisition date.) In addition to the existing rollover relief, bright-line property will be able to be transferred without triggering tax:

• If the transfer is to an associated person (as defined for tax purposes generally) and this association has been in place for at least 2 years prior to the transfer; or
• If the transfer is to a trust where all beneficiaries of the trust (other than infants less than 2 years and those associated due to marriage or adoption) have been associated with the transferor for at least 2 years. Charities and other not-for-profits which are not associated with the transferor can also be discretionary beneficiaries of the trust without disqualifying the transfer from rollover relief.  

While this represents a welcome expansion of the current rollover relief scenarios, it is important to note that access to this rollover relief will be limited to one transfer during a two-year period. 

The changes in the amendment paper largely reinstate the policy that was in place for the 2011/12 to 2019/20 income years:

• The tax depreciation rate will be set at 0% for buildings with an estimated useful life of 50 years or more, with application from the 2024/25 income year.
• Items of commercial fit-out (that are not part of the building structure) can continue to be separately depreciated, for tax purposes.
• For buildings acquired in or before the 2010/11 income year, the previous fit-out pool option (which provided a deduction for fit-out items not separately identified from the building) will be reinstated. This will only be available for those who previously used the fit-out pool option, with adjustments for the 2021 to 2024 period. The fit-out pool rate has also been reduced from 2% to 1.5%. 

The amendment paper contains welcome amendments to confirm that disposal of trading stock for below market value (e.g., when donated) does not require an adjustment (which may give rise to taxable income), other than in limited cases. The limited cases are disposal to an associated person, for own use / consumption, or if the stock is not disposed of in the course of carrying on a business or in deriving income (other than donations to a donee organisation). Consequential amendments are also proposed to the purchase price allocation rules, to ensure they interact as intended with the revised trading stock rules.

The amendment paper introduces a new 12% duty on the offshore gambling profits of online gambling operators that promote such services to NZ consumers.

The offshore gambling duty will apply from 1 July 2024 to online gambling operators that are subject to (and required to register in NZ) under the GST remote services rule. 

The amendment paper proposes a transitional rule to remove the need for electronic marketplace operators to deduct GST on supplies of accommodation through the platform, if the contract for the accommodation services was entered into before 1 April 2024 (and the time of supply is after that date).

An accompanying notification requirement is that the platform operator must take reasonable steps (and within a reasonable timeframe) to inform any GST registered suppliers that the transitional rule has been applied and, therefore, the supplier will need to account for the GST themselves.