by Kumudu Hettiarachchi (CA).…………… One of the biggest upsets happened very recently in New Zealand tax legislation is the removal of mortgage loan interest deductibility & extension of bright line test. I think quite a few Sri Lankans who lives in New Zealand already owns more than one house or might wish to buy their second home very soon or else you may be already in the property buying and selling houses. So, if you are falling under the above categories, it is worth reading this article and get to know a general understanding about what is going to be changed with the housing market reforms introduced by the NZ government.
I honestly think our Sri Lankan community will be benefited if I simplify the above change in Tax law in an understandable manner to everyone.
Before we start and to give a little bit of context, I would like to quote following from the expert institute which I belongs to about the questions being asked against these reforms due to lack of consultation from interested parties. “The Government’s latest housing package designed to increase the supply of houses and remove incentives for property investors does not include sufficient consultation for such far-reaching changes”, says Chartered Accountants Australia and New Zealand (CA ANZ). “Inclusion of the tax changes to the bright-line test into an existing tax bill in its final stages before Parliament effectively precludes public consultation. There will be limited opportunities to consult on peripheral matters only,” said John Cuthbertson FCA, NZ Tax Leader for CA ANZ. Treasury (NZ) also has expressed concerns about tight timelines and the lack of consultation with officials.
Mortgage loan Interest deductibility
As of now, if you have bought your second home with a mortgage loan, then the interest you pay on account of that loan can be deducted as an expense against the rental income received when you file your income tax return. This allows you to reduce your tax obligation.
However, as per the recent tax changes, you are not allowed to deduct such interest from 1 October 2021 for residential investment properties (second homes) acquired on or after 27 March 2021. The interesting point is, any person who already owned residential investment properties (second home or more) will also not entitle to deduct such interest in full but phased out by 25% each year. I will not go in depth into exceptional applications of the law at this point, but this is what it means in general.
However, there is an exception to this rule saying that you are still entitled to deduct interest if you buy a newly built house for giving it to rental purposes. But what constitutes a “newly built house” will also be open to consultation and regularized in the coming months.
In other words, whoever have more than one houses, should be ready to absorb more income tax obligations in the coming years. Further, from the financial year 2026 and later, no deductions will be allowed at all. You can self-check whether you are going to fall into any additional tax obligations by referring to below simplified table.
|Second home (investment property) bought…||Rule|
|1 April 2020–31 March 2021||100% of interest can be claimed|
|1 April 2021–31 March 2022 (transitional year)||1 April 2021 to 30 September 2021 – 100% of interest can be claimed 1 October 2021 to 31 March 2022 – 75% of interest can be claimed|
|1 April 2022–31 March 2023||75% of interest can be claimed|
|1 April 2023–31 March 2024||50% of interest can be claimed|
|1 April 2024–31 March 2025||25% of interest can be claimed|
|From 1 April 2025 onwards||0% of interest can be claimed|
Extension of Bright line test period
The bright-line test means if you sell your second home (residential investment property) within the first 5 years, you will pay tax on any profit made on the sale with any other income that you earn in the income year. This 5 year period has been extended to 10 years now.
That means, you must wait 10 years if you wish to not to catch into any tax obligation at the time of sale of the property. You can self-check whether you are going to fall into any additional tax obligations by referring to below simplified table.
|Second home (investment property) bought…||Rule|
|Property bought before 29 March 2018||Not subject to either the 5 or 10 year bright-line test|
|Property bought between 29 March 2018 and 27 March 2021||Subject to existing 5 year bright-line test|
|‘New builds’ acquired on or after 27 March 2021||Subject to 5 year bright-line test|
|Property acquired on or after 27 March 2021||Subject to the 10 year bright-line test|
What you don’t need to worry
If you have only one house where you live in or if you are on rent, you do not need to worry about these changes in Tax law at all.
If you are not sure about your position
Yes, the Tax law is always difficult to understand, and it is an area has so many exceptions and different ways of applying it to your specific circumstances. If you have any doubts and questions, it is strongly recommended to consult a tax professional to understand your situation and then plan your tax obligations in advance.
In summary, the main idea of this article is to make our community aware of the recent changes in NZ tax law in relation to an area where everybody is interested and will fall in to one day in their life being a property owner. Following tables will further summarize and elaborate the different categories and respective due dates for easy reference.
Kumudu Hettiarachchi (CA)