Business smarts TAX & FINANCE
A government attempt to reduce investor demand for residential properties has led to two key changes worth knowing about. AUTHOR: BRETT CROMBIE, STRAIGHTEDGE ACCOUNTING
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t the end of March, a hefty piece of tax law was passed by Parliament. Called the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Act 2022, it brings into force some controversial, hot button tax changes. The new Act was accompanied by a Special Report, which clocked in at 216 pages. Only true tax enthusiasts are likely to read this report, but it is helpful to have a general understanding of the rules. Here is an overview.
1. Bright-line extension
The new Act clarifies the bright-line rules, which state that income tax is payable on gains from residential land if it is bought and sold within a 10-year period (or 5-year period if bought between 29 March 2019 and 26 March 2021). For new builds bought after 27 March 2021, a 5-year period applies. Reasons given for this change were to discourage the practice of speculating or trading in properties for gains, while encouraging new builds to increase the housing supply. There are certain exemptions to the rule, the key one being that it does not apply to a person’s ‘main home’, generally meaning the one a person is living in. There are also exemptions around inherited property and certain other types of less common ownership transfer. Property used for dual purposes (such as mixed residential and commercial) is also an area of complication that the new Act covers. Given the complexities around these rules, it is always good practice to seek expert ‘bright-line’ advice before purchasing an investment property, launching a new build or selling a property.
2. Interest limitation changes
The interest limitation rules are another
government effort to reduce investor demand for residential property by making it a less attractive investment proposition. Previously landlords were allowed to deduct all interest costs when calculating their income tax. These deductions are now limited, and the extent of the limitation depends on whether the property was acquired before or after 27 March 2021.
Properties acquired before 27 March 2021 For these ‘Grandparented’ properties, interest deductions are progressively denied over a transition period between 1 October 2021 and 31 March 2025.
Period that ‘Grandparented’ residential interest is incurred
Percentage denied
Income tax return due date reminder The 2022 tax year ended on 31 March 2022, so now is the time to keep an eye on due dates for income tax and have a plan to prepare your accounts. Note that tax returns for the 31 March 2022 period are due on 7 July 2022. If you have an extension or use an accountant, this due date can stretch to 31 March 2023.
Summary
1 October 2021 to 31 March 2022
25%
1 April 2022 to 31 March 2023
25%
1 April 2023 to 31 March 2024
50%
1 April 2024 to 31 March 2025
75%
On and after 1 April 2025
100%
Properties acquired after 27 March 2021 For these ‘Disallowed’ properties, deductions are fully denied from 1 October 2021. Like many tax rules, there are various exemptions and special scenarios covering things like refinancing, changes of use and transfers to or from companies or trusts.
These two new tax rules demonstrate how government tinkering with tax is easier said than done. When every new rule comes with an enormous explanatory report, it is little wonder the public and small business owners feel swamped trying to keep on top of it. Even accountants have a challenge on their hands keeping up with it all. For trade business owners, rather than trying to know every nook and cranny of tax law, the aim should be to have enough knowledge to know when to be cautious and when to stop and seek expert advice.
About the author: Brett Crombie is a trade specialist accountant at Straightedge Accounting. For assistance developing a business plan, or for tax and accounting services, contact Brett on 021 301 022 or email brett.crombie@straightedge.nz
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