Bright-line and interest limitation changes
27 march 2021
Bright-Line and Interest Limitations Changes
Bright- Lines
In March 2021 the Government announced it would be extending Bright-line test for residential property purchased after the 27th of March 2021 from 5 to 10 years. This means any residential property purchased after that date and sold within 10 years will be subject to tax on any capital gain over that period.
New builds which include dwelling which have their Code of Compliance Certificate (CCC) issued after 27 March 2020 and conversions of commercial property, hotels and motels will still be subject to 5 years bright-line test.
The main home exemption still applies however is changed for property captured under the new rules. Under the old rules the exclusion applied as long as the property was used as the owner’s main home for more than 50% of the bright-line period. Under 10 year bright-line rules the exemption will instead only apply for the time the property is used as the owner’s main home. A “Buffer Rule” has also been introduced where the property is not used as the main home for continuous periods not exceeding 365 days, those days are counted as day where the property has been used as a main home, provide the dwelling is used as the main home at the beginning or end (or both) of that period. There is a proposed amendment which would extend this in the case where a person making reasonable effort to construct a dwelling intended for use as their main home. For the main home exemption to apply, at some point, the home must have been lived in. “intention” to live in is not good enough on its own.
Certain transfer to associated entities and changes from tenants in common to joint tenants and vice versa will not reset the bright-line date.
Interest Limitation
The Government has also made changes to remove a “loophole” for the deductibility of interest on residential properties acquired on or after the 27th of March 2021, this change is being phased in over a period of 5 years with the portion deductible interest decreasing yearly until 2025 after which no interest deduction will be allowed.
These changes will not apply to dealers, developers and subdivides, and builders subject to tax under CB7. New builds which are dwelling which have CCC issued after 27 March 2020 will also have an exemption which lasts 20 years from the issue of the CCC.
Interest which has been denied under the Interest Limitation can be added to the cost of the asset should the sale be taxable under the bright-lines rules, reducing any capital gain.
This material has been prepared for informational purpose only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please contact us for advice on your specific circumstances.
Bright- Lines
In March 2021 the Government announced it would be extending Bright-line test for residential property purchased after the 27th of March 2021 from 5 to 10 years. This means any residential property purchased after that date and sold within 10 years will be subject to tax on any capital gain over that period.
New builds which include dwelling which have their Code of Compliance Certificate (CCC) issued after 27 March 2020 and conversions of commercial property, hotels and motels will still be subject to 5 years bright-line test.
The main home exemption still applies however is changed for property captured under the new rules. Under the old rules the exclusion applied as long as the property was used as the owner’s main home for more than 50% of the bright-line period. Under 10 year bright-line rules the exemption will instead only apply for the time the property is used as the owner’s main home. A “Buffer Rule” has also been introduced where the property is not used as the main home for continuous periods not exceeding 365 days, those days are counted as day where the property has been used as a main home, provide the dwelling is used as the main home at the beginning or end (or both) of that period. There is a proposed amendment which would extend this in the case where a person making reasonable effort to construct a dwelling intended for use as their main home. For the main home exemption to apply, at some point, the home must have been lived in. “intention” to live in is not good enough on its own.
Certain transfer to associated entities and changes from tenants in common to joint tenants and vice versa will not reset the bright-line date.
Interest Limitation
The Government has also made changes to remove a “loophole” for the deductibility of interest on residential properties acquired on or after the 27th of March 2021, this change is being phased in over a period of 5 years with the portion deductible interest decreasing yearly until 2025 after which no interest deduction will be allowed.
- Residential properties acquired on or after 27 March 2021
- No interest deduction from 1 October 2021
- Residential properties acquired before 27 March 2021
- 1 October 2021 to 31 March 2023 75%
- 1 April 2023 to 31 March 2024 50%
- 1 April 2024 to 31 March 2025 25%
- 1 April 2025 on 0%
These changes will not apply to dealers, developers and subdivides, and builders subject to tax under CB7. New builds which are dwelling which have CCC issued after 27 March 2020 will also have an exemption which lasts 20 years from the issue of the CCC.
Interest which has been denied under the Interest Limitation can be added to the cost of the asset should the sale be taxable under the bright-lines rules, reducing any capital gain.
This material has been prepared for informational purpose only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please contact us for advice on your specific circumstances.
New 39% personal tax rate:
12 May 2021,
NEW 39% PERSONAL TAX RATE:
From the 1st of April 2021 the top marginal tax rate for individuals is being raised to 39% on income earned over $180,000. With this change there are several things to consider from a tax perspective as company and trust tax rates remain at 28% and 33% respectively. It may seem prudent to setup a trust or leave more profit in your company as a means to lower your overall tax bill. However, the IRD has signaled they will be closely monitoring the establishment of new trusts, movement of funds, and other related activity through the use of increased disclosure requirements on taxpayers and the increased capability of their IT system to carry out analytics to identify behaviour changes. Minister of Revenue, Hon David Parker has stated “If that behaviour becomes apparent, then we’ll move to increase the trust rate to avoid that being used as an avoidance loophole”.
A “tax avoidance arrangement” is an arrangement that has tax avoidance as one of its purposes or effects, the tax effect must be more than merely incidental. If a taxpayer is found to have entered into a tax avoidance arrangement, they are subject to penalties of up to 100% of the shortfall. It is imperative that there are commercial reasons outside of tax minimisation for restructuring involving trusts or companies, and transactions related to them as IRD scrutiny will be particularly high in these areas.
NEW 39% PERSONAL TAX RATE:
From the 1st of April 2021 the top marginal tax rate for individuals is being raised to 39% on income earned over $180,000. With this change there are several things to consider from a tax perspective as company and trust tax rates remain at 28% and 33% respectively. It may seem prudent to setup a trust or leave more profit in your company as a means to lower your overall tax bill. However, the IRD has signaled they will be closely monitoring the establishment of new trusts, movement of funds, and other related activity through the use of increased disclosure requirements on taxpayers and the increased capability of their IT system to carry out analytics to identify behaviour changes. Minister of Revenue, Hon David Parker has stated “If that behaviour becomes apparent, then we’ll move to increase the trust rate to avoid that being used as an avoidance loophole”.
A “tax avoidance arrangement” is an arrangement that has tax avoidance as one of its purposes or effects, the tax effect must be more than merely incidental. If a taxpayer is found to have entered into a tax avoidance arrangement, they are subject to penalties of up to 100% of the shortfall. It is imperative that there are commercial reasons outside of tax minimisation for restructuring involving trusts or companies, and transactions related to them as IRD scrutiny will be particularly high in these areas.
3/3/2020
On top of the much publicised re-write of the Trust Act, Inland Revenue (IRD) has issued a recent classification in relation to whom is classified as "settlor" of a trust. Section HC 27 of the Income tax act 2007 states a settlor is a person who "transfers value to the trust, for the benefit of the trust or on terms of the trust".
However, IRD have recently provided definite clarification on this matter. A legislative amendment to HC 27 has been made and a "Commissioner's Operational Position" has been issued.
According to s HC 27(2), a beneficiary who has taken possession and enters into a contract to lend money back to the trust may be deemed a settlor if he or she:
However, a beneficiary will not become settlor if either:
If a person becomes a settlor it can lead to unintended tax consequence. The tax position of a trust is based on the tax residency of the settlor.
On top of the much publicised re-write of the Trust Act, Inland Revenue (IRD) has issued a recent classification in relation to whom is classified as "settlor" of a trust. Section HC 27 of the Income tax act 2007 states a settlor is a person who "transfers value to the trust, for the benefit of the trust or on terms of the trust".
However, IRD have recently provided definite clarification on this matter. A legislative amendment to HC 27 has been made and a "Commissioner's Operational Position" has been issued.
According to s HC 27(2), a beneficiary who has taken possession and enters into a contract to lend money back to the trust may be deemed a settlor if he or she:
- Contracts to be paid nil or below market-rate interest, or
- Contracts to receive interest but does not make demand for such interest or defers demand, or
- Does not demand repayment of capital.
However, a beneficiary will not become settlor if either:
- The amount owing to them from the trust at the end of the income year is $25,000 or less; or
- The trust pays interest to the beneficiary at a rate equal to or greater than the prescribed IRD interest rate.
If a person becomes a settlor it can lead to unintended tax consequence. The tax position of a trust is based on the tax residency of the settlor.
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