By Terry Baucher
Wednesday’s Mini-Budget clarified a couple of items but left the big decisions until the New Year.
Firstly, the Mini-Budget confirms the bright-line test will drop back to two years from 1 July 2024. Commercial building depreciation will be withdrawn from 1st April 2024. Both measures were signalled in the Coalition Agreements and the timeline is as expected.
But…although the Finance Minister Nicola Willis confirmed “the Government’s commitment to fully restoring interest deductibility for rental properties”, there is no firm news about exactly how this will be phased in and we will have to wait for the details to be announced in the New Year. Reading between the lines changes to interest deductibility may no longer be backdated to 1st April 2023 as the accompanying press release refers to “an intention to increase interest deductibility for rental properties from April 2024”.
Similarly, there is no clear timeline about any adjustments to tax thresholds. Instead “the Government is progressing work to deliver meaningful income tax reduction in next year’s Budget…and for delivering income relief to workers and their families.” This work will also “uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy as a pathway to delivering National’s promised tax relief.”
We may get a clearer idea of timing when the Budget Policy Statement is released next March. All the Minister would say when questioned is that the details would be confirmed in the Budget, but the Government is still committed to changes as from 1st July 2024.
The removal of commercial building depreciation is expected to be worth $2.3 billion over the forecast period to 30 June 2028. Treasury’s profile of the effect looks odd but apparently reflects the lack of information available to accurately calculate the impact of the policy.
| 2023/24 | 2024/25 | 2025/26 | 2026/27 | 2027/28 &Outyears |
Total |
| $ mln | $ mln | $ mln | $ mln | $ mln | $ mln |
| 0 | 57 | 1,120 | 567 | 567 | 2,311 |
In terms of paying for the future tax relief, apart from the withdrawal of commercial property depreciation, funding from the Emissions Trading Scheme will go into the Consolidated Fund rather than be ring-fenced for environmental measures.
As the Treasury HYEFU documents made clear, the economy has hit a hole with the impact of several quarters of negative GDP per capita growth masked by record immigration. That in turn means falling corporate income tax and GST revenue. In fact, just under 50% or $20 billion, of the expected increase in tax revenue for the forecast period to 30 June 2028 is to come from increased PAYE on wage growth and fiscal drag.
Treasury estimates the effect of fiscal drag (when increased wages cross a tax threshold, raising the effective marginal tax rate) to be $4.5 billion over the five year forecast period. That highlights both the need to adjust tax thresholds but also the cost of doing so. Clearly, squaring that circle is still an issue the Minister and Treasury are yet to resolve.
Nicola Willis spoke with some enthusiasm about the prospect of Inland Revenue delivering “hundreds of millions” from increased audit activity but didn’t confirm whether the department would still be expected to cut 6.5% of its baseline expenditure. (Bear in mind that Inland Revenue’s headcount has fallen by 25% since 2017).
In summary, there was very little to get enthused about for Christmas, although the Finance Minister seemed to enjoy laying it on thick about the state of the Government’s finances. Relief might be on the way but for now there’s a great dearth of detail.
48 Comments
Maybe the headline should be "the seven vials"?
I wonder if the "hundreds of millions" from increased IRD audit activity could come from delving deep into the intention rule, especially with the reduced Brightline test?
The property tax avoidance intention capital revenue inequity rort is well past it's use by date. This is costing the taxpayer and society in ways that can't be measured by "value for money".
Tax professionals should be well aware of this, but I guess much like bank economists, they're bound by their vested interests, and ultimately blind.
Yes - I've been wondering the same thing. On their website they've beefed up information about the intention rule involving example scenarios, questionnaires etc. I think this is quite plausible the IRD will be watching for those that sell from 01 July. The "Intention provision" has been in play for some time however poorly enforced. This could be quite a cash cow for an fiscally ailing Government.
On their website they go into detail about sources of information gleaned from documents held with related banks, mortgage broker, REA etc. There might even be a pattern of buying and selling over time. It would be an unpleasant predicament having to prove there was no intent after such an audit suggesting intent existed.
I imagine it could be hard, especially if the rental property was bought using an interest only mortgage and was negatively geared.
While they could say "well the cashflow numbers never really got to where I wanted them to", IRD could respond with "well the previous 20 years of rent inflation was x%, the 3 years you've owned this property the rental market has still realized x% p.a. inflation", so to expect more than that is not realistic.
If an investor bought when interest rates were 2.5% and now they're 7%, it's easy to demonstrate why someone would change their mind and sell. Depends if IRD thinks they're entitled to tax free gains at the other end.
Agreed - subject to the existence of capital gains, there will no doubt be genuine "outs" for some. I don't think it's a stretch that the introduction of the five and ten year Brightline contributed to a drought in listings at a time cheap money was readily available, therefore enhancing the upswing. The removal of such might well have the opposite effect.
Here's how it might play out.
A) Real estate agent (to owner occupier / trader vendor with residential property in location / market with many property investors who is considering selling): the brightline test has been shortened to 2 years, effective July 2024. There is potential for negative cashflow properties to be listed for sale.
B) Owner occupier lists property for sale in New Year - rush of owner occupier listings for sale, hoping to sell before the potential increase in listings in May - June 2024 (hoping to sign S&P agreement before May - June 2024)
C) Property traders speed up their project and lists property for sale as soon as possible - hoping to sell before the potential increase in listings in May - June 2024
D) May - June 2024 - Negative cashflow property investors list their residential property for sale
E) July 1 2024 onwards - sale and purchase agreement signed - avoid brightline test on capital gain
Will there be a significant increase in listings for sale in those locations where there are a large number of non owner occupiers? (all property investors who purchased before June 30, 2022, will not be subject to tax on the capital gain under the brightline test)
meh,
This bizarre 'intentions' rule could be swept away if we joined much of the world in having a proper CGT. We are currently the only OECD country without one. We often look across the ditch with a degree of envy, yet they have one and they have specific property taxes as well. In Victoria they also now tax empty properties.
We don't actually need a CGT. What we need is to remove the capital revenue distinction in tax law. Remove the loopholes and exemptions. If it's going to be an income tax then tax all forms of income. What it allows for is a broader tax base but then we also need to address other underlying issues. The CGT/tax anomalies are merely symptoms of wider problems.
We also need to discuss the role and purpose of tax. It's origins and purpose have changed significantly over history but the law, it's intent etc have never had a proper review. It was always written to put the burden on those least capable of escaping it. We can't continue with the current division and angst over taxes. We can't continue with entire industries built around tax avoidance. Tax and corporate structures that are justified as asset protection are actually a front for mismanagement and self interest at the expense of others. It highlights that the social contracts are broken. Nor is tax an appropriate tool to manipulate people's behaviour.
The intention rule is a bit of a misnomer and seems to apply mainly to negative geared residential property investment. I don't believe it was widely known during the 80's/90's but I do recall the mass marketing at the turn of the century. "Tax free gains, tenant to pay the mortgage and tax refunds galore". It would suggest that almost all property was for the purpose of capital gain and not rental income/cashflow. The intention being to cash out at some point in time, especially if it was one property and the retirement fund. And we know since that most owner occupiers have been chasing the gains too. It's all led to this massive distortion and imbalance in what is arguably a basic necessity for not only human wellbeing but also social harmony.
There's also the issue that residential property investment does not equate to a conventional for profit enterprise.
Capital gain is simply an increase in the perceived value of an asset. Clearly this is not revenue. Some would argue that the increase in the price paid when the asset is sold constitutes revenue, but at the point of sale the value increase is a fait accompli so there is no profit to be taxed. Only if it can be shown that the property was bought with the intention of selling at a profit can one reasonably tax any profit that is made.
I know "intention" seems an awkward thing for IRD to rely on, but that can't be helped. A seller who bought for some other purpose should not be penalized on that account.
Yet we know everyone was chasing capital gains because the numbers generally did not stack up any other way. So the intention was ultimately tax free profit.
Many could argue that the increase in "value" is provided by the infrastructure, facilities and services (ie the commons), and policy settings provided by central and local govt. and should therefore be subject to 100% tax to fund said commons.
Many could argue that the increase in "value" is provided by the infrastructure, facilities and services (ie the commons), and policy settings provided by central and local govt. and should therefore be subject to 100% tax to fund said commons.
So what. It could be argued that the seller of the property still selling a house which is worth what the buyer is prepared to pay so there is no profit to him to him from the transaction. The benefits you refer to get built into the value of the house after the seller has theoretically paid for them through the taxes he has paid over the years.
In a normal taxation system depreciation would be deductible and, in the event of capital gain occurring at the point of sale, there would be an excess depreciation clawback, which would probably offset the capital gain. Where depreciation is not deductible a landlord is probably paying the tax on the imputed clawback in advance, thus offsetting the capital gain, either partially or completely.
Are you a tax law professional/expert?
Are you an English Literature graduate?
The problem with most laws is they're not written for the common people to understand, hence an industry of professionals and institutions, the majority of whom are only in it to line their own pockets and aren't exactly critical thinkers of said laws. Most media, journalists and politicians don't understand law either and merely parrot each other. Then we have the result of laws being abused, misinterpreted and applied inconsistently, and nobody's any the wiser.
The trouble with terms like "intention" and "purpose" as used in tax law is that they are too vague. There is plenty of discussion in this this thread, so far, about "intention", but what about "purpose", particularly as it applies to the question of whether or not interest should be deductible. Some would say that the purpose of borrowing is to gain taxable income; and that therefor interest should be deductible; but on the other hand some would say that the purpose of borrowing is to raise capital and, as capital is not income, interest should therefor be non deductible.
I think it would be clearer to simply acknowledge that an expense is deductible only if it contributes to the process by which the taxable income is gained. When it comes to investment, the business process does not start until the investment is made, and since the borrowing precedes the investment, interest, being the cost of borrowing, cannot be a contributor to that process and therefor should be non deductible. It should be noted that money does not create income. Income is created by human effort, sometimes assisted by property or machinery.
Some interesting logic there, but I do like your reasoning. Tax law purports to have a purpose and intention and also defines taxable income with numerous exemptions. It is the capital and revenue distinction that further excludes certain avenues of income as being non taxable. It is these loopholes that distort the playing field and imposes a higher burden on wages and salaries, on those unable to structure their incomes around capital. Hence we have the issues of legal tax avoidance, negative gearing, and the wealthy paying less in proportion to a wage earner or none at all.
The issue with the residential property investment market is that most aren't viable "businesses", relying mainly on tax refunds and tax free capital profits. That's where the "intention" comes into question.
I suggest that if it's an income tax then all forms of income be taxed, ideally to lower the burden on the lower and middle income earners. Does that mean the same expenses should be deductible too? Hard to say given the propensity and ability of many to load up on debt and expenses for the purpose of minimising tax. It creates wider issues caused by debt leverage and reliance on credit creation rather than money flowing through the economy. It highlights many issues in the tax system, economic theory, monetary policy, capitalism, and "wealth" accumulation that most just don't want to see.
I believe we had less equality issues when tax rates were much higher on the highest earners but that was before finance capitalism and wealth hoarding went into hyper drive.
Unfortunately the actual reality of the money, usury and financialisation model would tend to refute that money or capital does not create income and that it's all earned by human effort.
It is the capital and revenue distinction that further excludes certain avenues of income as being non taxable.
Unfortunately the distinction between capital and is a very real distinction, so tax law cannot reasonably ignore it.
The issue with the residential property investment market is that most aren't viable "businesses", relying mainly on tax refunds and tax free capital profits. That's where the "intention" comes into question.
As I have argued elsewhere, the use of "intention" is probably too vague to be used as a criterion for taxability . Investors should taxed in accordance with what they do rather than according to what their intentions are deemed to have been. However the distinction between capital and revenue still needs to be observed.
Interestingly some investors in shares call themselves "sharetraders" and inform the IRD of this fact. This implies that they are prepared to pay CGT on any "profits" they make selling shares. However they expect, in return, that any losses they may make will be tax deductible.
I suggest that if it's an income tax then all forms of income be taxed
But capital gain is not income. That's why the distinction between capital and income is important. It is the failure to recognise that distinction that is leading you astray. There are other ways of reducing the the tax burden on low income earners: more steeply progressive tax systems, and wealth taxes, are two alternatives that come to mind. With wealth taxes in particular we don't muck around trying to pretend that wealth is 'income' in order to justify taxing it. Its proponents make no bones about saying "you are wealthy, so we will tax that wealth".
Agreed. They worry me too.
It appears the secret spreadsheet that they refused to release before the election was either childish or of extremely low quality. It is also clear they didn't read or understand the PREFU or the previous budget.
Now they've added this mini-budget fiasco where little new was presented to the list of time wasting and incompetence.
So much for the 100 days of action. More like 100 days of prevarication.
Talk about over-promising and under delivering!
Who wants to bet that both the removal of interest deductibility and the 'up to $200 a week' tax cuts will be heavily scaled back?
It's a shame really. I'm a centerish right voter, but after voting for National (my first time voting) in 2008 I've never voted them since. It's been ACT ever since (which is far right), I did so because for a while I saw what I thought was a bit more competency and real world relevant experience within the ACT ranks. But in the last few years I've kinda lost interest in politics.
I had secretly hoped maybe this time around National would be a little more clued up and a fresh change, but so far the only thing I'm seeing is a Blue instead of Red and the last 6 years put on rewind.
It was a really bad look having landlords tax relief at April 2023 and workers tax relief at July 2024. This 'problem' they now have with the books in worse shape could be a blessing for National, Act may not get their landlord tax relief ahead of Nationals 'squeezed middle workers'.
Interest deductibility was going to be 50% under the labour government, and the Nats had proposed changing it to 60% for the tax year 01/04/23 to 31/03/24. So it wasn't going to be that much of a change, but delaying it a year could bring in an extra billion dollars of revenue for the government.
What they need to do is implement an omnibus set of changes associated with the rental market:
- fully restore interest deductibility and perhaps even ring-fencing for landlords
- implement maximum weekly rent regulation for tenants
- remove accommodation supplements (a $2+ billion per annum savings for the government)
Give the market 6-months notice on the date it all comes into effect.
Great ideas Kate. The problem is they Will. Not. Work.
Why? Because house values will drop drastically. What's the problem with that? Very few houses will be built. Why? Who wants to build a house that will be worth a substantially less than build cost?
We've stuck with high house prices, like it or not, and it's mainly to do with regulations put in place by both red and blue governments that make all aspects of land and buildings more expensive than they need to be.
You'd implement a land tax? And put farmers out of business, one of the pillars of the economy....genious!!!!
Land taxes would be largely offset by reductions in income tax rates, so it is possible farmers would not be worse off. The real problem for farmers though is probably interest rates.
The Opportunities Party proposed a land tax, but it would have applied to urban areas only. Perhaps that would be preferable.
Disagree, land prices may drop to zero before house building needs to stop. If building does slow, build cost will likely reduce for some labour/materials which are currently scarce.
Furthermore, if we stop immigration then we'll have enough houses as the boomers die/move into retirement villages given our lower than replacement NZ born birth rate.
Disclaimer: I want house (house and land combined) prices to drop and become widely owner occupied again instead of an investment vehicle to 'get ahead'.
Why? Because house values will drop drastically. What's the problem with that? Very few houses will be built. Why? Who wants to build a house that will be worth a substantially less than build cost?
Property values would drop only if the measures suggested induced many landlords to sell up and leave the business. However, in that case, if prices dropped, those landlords would be replaced by first home buyers.
"Interest deductiblity is well entrenched in the business world"
That is the narrative by those with their vested financial interests. Consistency of interest deductibility amongst businesses.
Property investors in the long term rental market are competing against owner occupier buyers - one easy example to see this is at residential real estate auctions where these groups were bidding against one another creating FOMO previously, driving up prices of residential real estate.
Need to level the playing field for all buyers of residential real estate used in long term rental accommodation - owner occupier buyers and non owner occupiers. Need consistency of tax treatment amongst other buyers who buy for use for long term rental accommodation.
Removing interest deductibility for tax does this.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.