Interest Deductibility for Residential Rental Properties

UPDATE: The Government has released the proposed rules for limiting interest deductibility for residential property investments.

Delay the Interest Deductibility Tax Change

Delay the Interest Deductibility Tax Change – As a registered chartered accounting firm, Drumm Nevatt & Associates has joined calls to delay the interest deductibility tax change. Too many uncertainties make it unclear how much it will cost investors…

Eagle Landing in reference to capital gains tax in NZ

The Labour Government appointed Tax Working Group (“TWG”), headed up by former Labour Minister of Finance, Hon Sir Michael Cullen, is currently undertaking the fifth major review of the New Zealand tax system in the last 50 years.

The TWG has a wide brief, but its key purpose is to provide recommendations to the Government that will improve the fairness, balance and structure of the tax system over the next 10 years. The TWG released its interim report inviting further commentary on 20 September.

The hot topic of the review has been the consideration of Capital Gains Tax (“CGT”). The main driver behind the implementation of a CGT had been the perception that the tax benefits swaying investment towards the Residential Investment Property sector need to be balanced out. The interim report goes into some detail discussing the taxation of capital and wealth, firmly ruling out an implementation of wealth taxes, but leaving CGT on the table on the basis of fairness.

The report goes as far as discussing specific design features and identifying two main options, either taxing realised gains that are not already taxed, or taxing certain assets on a deemed basis (akin to a risk-free rate of return method). The family home, and the land under it would be exempt under either method.

The proposed risk-free rate method smells a lot like a wealth tax which would be payable annually on a base asset value. The risk-free rate would be set at a level to reflect perceived average annual increase in asset values. The need to fund the cash tax payments arising from a CGT applied on this basis should be particularly concerning for anyone holding investments in property or business!

Another concern is the proposal that should a CGT be implemented then capital gains from assets which the CGT applies would be caught from the implementation date, and valuations of all assets would be required on that date to assess the base price that capital gains would be calculated on.

The TWG is still forming its views on the implementation of a CGT and will complete a comparison between the best proposed methodology and the status quo to determine its ultimate recommendation. Whilst no conclusive recommendation has been made, it appears that today New Zealand is one step closer to a broad- based CGT.

To make sure you are ready when the Eagle does land, contact the team at Drumm Nevatt & Associates Limited to discuss.