Let’s face it, the majority of people with investment properties have 2 major needs. They want the accounts done FAST and their tax refunds in the bank FAST. They don’t want it to cost the earth. Our practice is totally focused on achieving fast turnaround for our clients, and competitive fees are really just something that comes hand in hand with completing the job quickly and efficiently.
We set up Simple Accounting just over 15 years ago, since then our firm has grown and we now have several hundred clients with rental properties.
We’ve seen a number of changes over the years:
Changing LAQCs to LTCs
Removing depreciation claim on properties
Ring fencing rental losses
And of course bright-line tests!
What is the bright-line test?
The bright-line test was first introduced in October 2015. Since then the 2 year rule was extended to 5 years, and just recently to 10 years.
It applies to investment properties, and means that depending on when you buy your investment property, if you sell it within 2, 5 or now 10 years of purchasing it, the profits are taxable.
There are exemptions to the rule for your main home and for commercial property.
Important dates
The following dates are important to take note of for which period you will fall under.
On or before 1 October 2015: Bright-line period does not apply.
Between 1 October 2015 and 28 March 2018: 2 year bright-line period applied. Seeing as we are well outside of this timeframe the bright-line no longer applies.
Between 29 March 2018 and 26 March 2021: 5 year bright-line period applies.
On or after 27 March 2021: 10 year bright-line period applies.
10 year bright-line test
A few things to note about the 10 year bright-line test...
On or after 27 march 2021:
Investment Properties purchased on or after 27th March 2021 will be subject to the 10-year bright-line test.
Exclusions to this ruler are:
New-build properties will still be subject to the 5-year rule.
If you purchased the property on or after 27th March 2021 but signed an offer before 23rd March 2021 that you can’t get out of, then you’ll be subject to the 5-year rule.
Main home exclusion changes:
The “main home” exclusion has been changed. For properties purchased after 27th March 2021 which are used for more than 12 months as an investment property, your taxable income will be calculated by proportioning out the gain based on the percentage of the time it was used as an investment property versus the total length of time owned.
The interest 'loophole'
A few notes on interest deductibility...
For properties purchased on or after 27 March 2021:
Interest will be disallowed as a tax deduction from 1 October 2021. If you purchased the property on or after 27th March 2021 but signed an offer before 23rd March 2021 that you can’t get out of, then you’ll be subject to the “all other investment properties” rule and have interest phased out over the next 4 years.
For "all other investment properties:"
Disallow interest over the next 4 years:
Reduce the interest deduction to 75% from 1 October 2021 to 31 March 2022.
Reduce the interest deduction to 75% for the March 2023 year.
Reduce the interest deduction to 50% for the March 2024 year.
Reduce the interest deduction to 25% for the March 2025 year.
Reduce the interest deduction to NIL for the March 2026 year and onwards.
New-build properties:
They are also taking consultation in regards to the interest for new build properties. The are looking at giving an exemption for new build properties from the interest deductibility rule changes. We understand that this may mean that interest for new build properties will remain deductible. The other factor that they are taking consultation on is whether or not to allow the interest costs to be deducted against the profits from selling an investment property if they are captured by the bright line test.
Maybe all is not lost?
The government has stated that they intend to make these changes, but neither have actually been “legislated” or made law yet. There are two areas that they are seeking “consultation” on:
New build definition
The short answer is that we can’t give proper advice on this, as it is still uncertain. Some comments:
The government are going through a consultation process over the next few months to determine:
The definition of a “new build.”
Exactly what the new build interest exemption means.
Once they’ve done that, and it is passed into legislation, we’ll finally actually know for sure.
Interest deductibility changes
Our initial thoughts on the interest deductibility exemption for new builds was that it isn’t a full exemption, it just means that it would be phased out over 4 years, rather than from 1 October 2021. Since then, after reading a number of articles and notes from tax policy it appears looks likely it will be a full exemption, meaning that interest for new builds will be fully deductible. This makes sense, as it is a clear incentive for people to build new rental properties.
In saying that though, there are a number of articles out there that state that this is a full exemption, and that interest will remain fully deductible.
Whether or not people who do sell and are captured by bright line will be able to then deduct their interest costs as an expense.
Existing 'rusty' fish hooks
Transferring property to a new entity is a sale so could trigger bright-line if it falls within the time period. Examples of this could be if you transfer your investment property into a Trust, or a company. So you don’t have to sell it to someone else to be caught.
If your property is owned by a company, then transferring the shares will also be treated as a property sale.
If your company is a look through company and you cancel the LTC status, this is also treated as though it is a sale.
In all of the above situations you’d need to be careful about depreciation recovery.
Shiny new fish hooks
Being committed to purchase on or before 23rd March. This exemption would mean that your property would be subject to 5 year bright-line rather than 10, and that you’d be able to phase the interest out over 4 years, not straight away.
This doesn’t mean - If you had “made an offer on or before 23rd March” and still decided to go ahead with the transaction, it only applies if you were committed and couldn’t pull out of the transaction.
The change of use rule could catch some people out. If a property changes from being your main home (which would be excluded from bright-line) to an investment property, then you would be subject to bright-line and have to pay tax based on the profit versus the portion of time it was an investment property.
Scenarios
We've compiled a couple of scenarios for you to simulate how these changes could affect you.
Click here to download this spreadsheet.
Further information
We'll do a free half hour consultation for all of you. Just click here if you wish to book a meeting with us.
Our office is based in Thorndon, and we also do a number of meetings at Park Kitchen in Miramar, as well as virtual sessions through Zoom, Teams or a phone call.
The IRD have published some useful fact sheets:
· Click here for more information on the 10-year brightline test changes.
· Click here for more information on the interest changes.