Tax change expected to cost property investors $1b over four years

Tuesday, 28 September 2021

A 20-year exemption will apply to new builds from the interest deductibility rules, with the benefit transferrable to new owners.

Tax changes affecting property investors detailed by the Government on Tuesday are likely to reap $1 billion over the four years they are phased-in, Revenue Minister David Parker says.

But Parker rejected an assessment from the National Party that the newly-fleshed out interest deductibility rules would inevitably push up rents.

The rule changes will lower the returns that many landlords can earn from rental properties for any given rent.

“Over the first four years we're expecting a decrease of tax deductions totalling $1b,” Parker said.

But Parker said rents were “by and large set by the ability of people to pay”.

“Landlords already extract as much rent as they can from their tenants, in general,” he said.

* Let's not snuff out European-style rental options just as they're getting going

* Tax changes will have “chilling effect” on housing supply

The Government announced in March it was extending the bright-line test, reducing tax deductions on property investments, and would step up investment in communal infrastructure to support housing developments.

The Government set out the details of how the right to interest deductibility will be removed on most property investments, with a 20-year exemption for new builds resulting in a modicum of relief from some investors.

Parker said the ability for investors to deduct interest payments from their taxable income from property investments that they made before March 27 would be phased out over the period from Friday until March 31, 2025, with some exceptions.

Investors who are impacted by the rule change will still be able to apportion 75 per cent of their interest charges against their relevant taxable income between Friday and March 31, 2023, 50 per cent during the following tax year, and 25 per cent in the tax year after that.

The broad rule to prevent most property investors from offsetting interest charges against their taxable income was announced by Finance Minister Grant Robertson in March as the centrepiece of a package of measures intended to rein back surging house prices.

But investors have had to wait until now to see the details of what the Government is proposing.

Interest deductibility has already been removed on investments made from March 27.

In the key concession, Housing Minster Megan Woods said properties that received their code compliance certificates on or after 27 March 2020 would be eligible for interest deductions for “up to 20 years from the time the property’s code compliance certificate was issued”.

Importantly, that exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20-year period, making the benefit transferrable.

Deloitte tax partner Robyn Walker said the details of the rules confirmed on Tuesday, including the 20-year new build-exemption, were more generous than had been anticipated when the policy change was first sketched out.

Build-to-rent developer Kent Gardner took heart from the Government’s comments.

“They have been relatively concessionary.”

But the rules were complex, she said. “I think that will be a real challenge to a lot of people. They will need to get advisers to be able to understand it.”

Woods indicated more generous exemptions could apply to a class of purpose-built rentals, commonly known as “build-to-rent” developments.

“Purpose-built rentals are large residential developments designed for ongoing rental, rather than sale,” she said. “This is an emerging area and one where we see real potential to meet gaps in our rental market.

“I am expecting further advice on purpose-built rentals in coming weeks and will report back to Cabinet on whether there should be an extension beyond the 20-year period for some or all of this sector,” Woods said.

Kent Gardner, chief executive of Arc, which is developing properties as long-term rentals including a 48-home development in Onehunga, said he was encouraged by Woods’ comments.

Revenue Minister David Parker says the tax changes are likely to net IR $1 billion during their phase-in period, but longer term projections are harder to make.

“As one of those working hard to bring ‘build-to-rent’ to New Zealand, we are pleased the Government recognises that new builds are a key component of the build-to-rent sector,” he said.

“Interest deductibility for 20 years on new builds that are purpose-built rentals is a step in the right direction.”

But to really ignite the purpose-built rental sector, a bolder solution for the section was required, Gardner said.

“Minister Wood’s comments give us hope that the next phase of government policy will help us solve our rental housing crisis by specifically recognising ‘build-to-rent’ purpose-built rentals as a new and separate asset class, with extended exemptions,” he said.

The newly-announced rules will take effect from Friday, assuming they are passed into law by Parliament next year.

The possibility of amendments being made means there will still be a degree of uncertainty, but tax experts assume the proposal is the “worst” that could happen for investors.

The New Zealand tax leader of Chartered Accountants Australia and New Zealand, John Cuthbertson, has forecast that if changes are made at the select committee stage, they are more likely to favour investors rather than impose additional new restrictions.

National Party shadow treasurer Andrew Bayly said the Government had only belatedly cleared up uncertainties surrounding new builds.

National Party revenue spokesman Andrew Bayly says the approach of the bright-line rules is harsh and uncaring.

“This is all last-minute stuff.”

It was inevitable that removing interest deductibility for most investors would drive up rents, he said.

“The worst thing you can do is make rental prices higher because the people who rent are New Zealand’s most vulnerable.

“Inland Revenue strongly opposed any option to remove the ability to deduct interest and instead endorsed the status quo, saying additional taxes on rental housing are unlikely to be an effective way of boosting overall housing affordability,” Bayly said.

Act Party housing spokesman Brooke van Velden described the changes as a “tax grab”, citing earlier Treasury Budget documents they could bring in an extra $800m a year once fully implemented.

Parker said such longer-term projections were more difficult to make “because we're not clear how much investor effort will transfer into new builds, which of course is one of our objectives”.

It was “not necessarily” the case the changes would push rents, he said.

Property Council chief executive Leonie Freeman has previously forecast removing interest deductibility on most property investments will be counter-productive and have a “significant chilling effect” on investors’ appetite to build new houses.

But Parker indicated he believed the Government had struck a balance.

“We want to curb investors’ appetite for existing residential properties but also want to stimulate investment in new housing. That’s why we’re also proposing an exemption for property development and for new builds, allowing interest deductions in full,” he said.

Robertson said there were signs investors’ enthusiasm for investing in existing properties was waning.

“The detailed proposals we are releasing today will further level the playing field for existing homes in favour of first home buyers,” he said.

“Tax is neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government’s overall response.”

People will continue to be able to make interest deductions for income related to their main home – for example from flatters – and for farmland, some Māori land, the likes of hotels, retirement villages and student accommodation, and properties that are used as business premises.

The rule changes will next be examined by Parliament’s Finance and Expenditure Committee, which is expected to call for public submissions.