New Zealand Adds To Real Property Tax Reform Plans

new-zealand-adds-to-real-property-tax-reform-plans

Posted on 10-10-2019

New Zealand has released a new consultation on proposals to further clarify the deductibility of holding costs (rates, interest, insurance, etc.) where land that is subject to tax on sale is used privately while it is held.

The new consultation – Holding costs for privately used land that is taxable on sale – is the second consultation that has been launched recently, with the first being on precluding those who habitually buy or sell real property from accessing primary residence tax reliefs.

As part of the Government’s updated tax policy work program, officials are reviewing the current land rules, particularly in relation to investment property and speculators, land banking, and vacant land. The objective is to recommend ways to improve the efficient use of land, and ensure that the current tax settings are fair, balanced, and encourage and support productive investment.

One of the issues being considered is the rules for the deductibility of holding costs for land that is taxable on sale and is used privately (in whole or in part) while it is held. For example, this will arise where a holiday home or second home is sold within five years, so that the
gain from the sale is taxable under the bright-line test, and also where a person regularly purchases properties to renovate and sell, and lives in the properties while they own them.

Under current rules, it is generally accepted that, to
the extent that land is used to earn taxable income, holding costs are deductible. So, if a
person owns a rental property, holding costs are deductible in full (subject to the new
rental ring-fencing rules) because those costs relate to the taxable rental income. Equally,
if land is held by a land dealer, holding costs are deductible in full because those costs
relate to the taxable income from the sale of the land.

However, New Zealand’s tax system does not allow deductions for expenditure to the extent that it
is private or domestic in nature – known as the private limitation. This means that
holding costs relating to a person’s main home are not deductible.

In the consultation, Inland Revenue acknowledged that while the law is relatively clear about the deductibility of holding costs where land is
used solely for either income-earning or private use, the law is currently unclear about
the treatment of holding costs where they relate to land that is subject to income tax on
sale and is used privately while it is held.

It is being proposed that new exemptions should be provided where a person lives in a property they are renovating. It is proposed that New Zealand tax law should newly provide that costs of acquisition and improvements to land are deductible where land is taxable on sale under the bright-line test or the various 10-year rules, despite there being no knowledge that the land sale was going to be taxable when the expenditure was incurred. Further, amendments would be made to ensure that the provision that allows a deduction for the costs of acquisition and improvements overrides the private limitation so that the whole of those costs are
deductible even if the land is used privately.

New Zealand has released a new consultation on proposals to further clarify the deductibility of holding costs (rates, interest, insurance, etc.) where land that is subject to tax on sale is used privately while it is held.

The new consultation – Holding costs for privately used land that is taxable on sale – is the second consultation that has been launched recently, with the first being on precluding those who habitually buy or sell real property from accessing primary residence tax reliefs.

As part of the Government’s updated tax policy work program, officials are reviewing the current land rules, particularly in relation to investment property and speculators, land banking, and vacant land. The objective is to recommend ways to improve the efficient use of land, and ensure that the current tax settings are fair, balanced, and encourage and support productive investment.

One of the issues being considered is the rules for the deductibility of holding costs for land that is taxable on sale and is used privately (in whole or in part) while it is held. For example, this will arise where a holiday home or second home is sold within five years, so that the
gain from the sale is taxable under the bright-line test, and also where a person regularly purchases properties to renovate and sell, and lives in the properties while they own them.

Under current rules, it is generally accepted that, to
the extent that land is used to earn taxable income, holding costs are deductible. So, if a
person owns a rental property, holding costs are deductible in full (subject to the new
rental ring-fencing rules) because those costs relate to the taxable rental income. Equally,
if land is held by a land dealer, holding costs are deductible in full because those costs
relate to the taxable income from the sale of the land.

However, New Zealand’s tax system does not allow deductions for expenditure to the extent that it
is private or domestic in nature – known as the private limitation. This means that
holding costs relating to a person’s main home are not deductible.

In the consultation, Inland Revenue acknowledged that while the law is relatively clear about the deductibility of holding costs where land is
used solely for either income-earning or private use, the law is currently unclear about
the treatment of holding costs where they relate to land that is subject to income tax on
sale and is used privately while it is held.

It is being proposed that new exemptions should be provided where a person lives in a property they are renovating. It is proposed that New Zealand tax law should newly provide that costs of acquisition and improvements to land are deductible where land is taxable on sale under the bright-line test or the various 10-year rules, despite there being no knowledge that the land sale was going to be taxable when the expenditure was incurred. Further, amendments would be made to ensure that the provision that allows a deduction for the costs of acquisition and improvements overrides the private limitation so that the whole of those costs are
deductible even if the land is used privately.