Decks cleared for New Zealand tax cuts

This article was current at the time of publication.

A raft of tax measures enacted by the previous New Zealand government were reversed on 1 April, setting the stage for the new government’s promised Budget Day tax cuts.

The government has signalled the cuts are likely to be delivered via the first adjustments to income tax brackets since 2010.

Funding for tax cuts will come partly from a higher trustee tax rate, the cancelling of depreciation for commercial buildings, and public sector budget cuts.

The trustee tax rate has been increased from 33 per cent to 39 per cent for the 2024–25 and later income years.

New Zealand’s Inland Revenue (IR) has issued a rare General Guidance outlining where it may consider some consequent arrangements to constitute avoidance, and where it may not.

It has also issued a Special Report on the increase, which was announced by the previous government in the 2023 Budget, and a Fact Sheet on PIEs for Trustees.

There has been widespread speculation that trustees will switch investments into PIEs (portfolio investment entities), where the top tax rate is 28 per cent.

Andrew Dickeson FCPA, Taxation Services Director at Auckland-based business advisory firm Baker Tilly Staples Rodway, says he understands that the IR and policy groups are examining the PIE regime to ensure it is still fit-for-purpose.

“If I had to second-guess what’ll happen, I’d say they’ll make PIEs only for genuine long-term savers by making the lock-up period three years or more, not six months.”

Angus Ogilvie FCPA, Chair of CPA Australia’s New Zealand tax committee, said IR believes PIE investments by trustees will not be considered avoidance.

“I think we’ll see a lot of trust money going in there.”

Bright-line restored

The bright-line regime for residential property investments will be restored from the previous government’s 10 years to two years from 1 July 2024.

Ogilvie says higher interest rates suggests there will be many investors looking to exit residential property investments from July – but they’ll need to look carefully at settlement dates if they aim to avoid triggering the bright-line threshold.

In addition, investors should seek advice so they don’t inadvertently trip over the land provisions of the Income Tax Act.

For example, Ogilvie says, one provision catches those buying for the purpose of making a capital gain.

One client of Ogilvie’s was issued an $80,000 tax bill from selling a property four days early, after failing to consult.

“For the sake of a small fee, they could save themselves a lot of tax.”

Mortgage interest deductibility

Residential property investors will be able to deduct 80 per cent of the interest expense on their mortgages from 1 April 2024 and 100 per cent from 1 April 2025, reversing the previous government’s phase-out of deductibility.

Neither Dickeson nor Ogilvie thinks the reversal will have a significant and immediate effect on housing market activity.

“There will be no tsunami of buying – real estate prices are keeping up, as are interest rates, and there’s also the effect of the bright-line changes,” Ogilvie says.

Dickeson says deductibility doesn’t flow through to many investors because “ring-fencing” prevents deduction from their PAYE or other income.

“I’m sure there will be investors wanting to sell, but that’s unlikely to amount to a glut or trigger a downturn.”

Commercial depreciation removed

The government has removed from 1 April 2024 the ability of commercial property owners to claim depreciation on their buildings.

Dickeson says the change was prompted by the need to fund the re-extension of the bright-line regime and the reversal of mortgage interest deductibility.

Ogilvie agrees the move was driven by the need to bring in more revenue.

A Tax Working Group 2018 paper recommended that tax depreciation for commercial, industrial and multi-unit residential buildings be reinstated.

“Most jurisdictions allow it. The view is that commercial buildings do depreciate and have a limited useful life,” Ogilvie said.

The move would bring in “a sizeable chunk of revenue” – an estimated NZ$2.31 billion over four years.

Keeping up with App tax

New rules around GST on accommodation and transport services – the so-called “App Tax” – came into effect from 1 April.

The change requires “marketplace operators involved in the supply of ride-sharing/ride-hailing” [such as Uber] and delivery services for food and beverages, and “marketplace operators and listing intermediaries involved in the supply of accommodation services” [such as Airbnb] to collect GST from suppliers of those services within New Zealand, regardless of whether they are currently registered for GST.

IRD has issued a Special Report on the changes.

An “offshore gambling tax” has been introduced by amending the Gambling Duties Act 1971, effective 1 July 2024.

The change, explained in an IR Special Report, applies a 12 per cent offshore gambling duty to online gambling provided by offshore operators to New Zealand residents.

Budget debate

Ogilvie says “the real debate” on tax involves the advisability of the government continuing to borrow to fund tax cuts, with an announcement due in the Budget on 30 May.

The government has signalled the cuts are likely to be delivered via the first adjustments to income tax brackets since 2010.

“One could argue it’s reckless not to adjust the superannuation age, or to make any other adjustment to burgeoning public sector costs other than fairly anaemic cuts,” Ogilvie says.

“Nonetheless, it will be an interesting Budget for wage and salary earners.”