Supplementary Order Paper No 23 to the Taxation (Annual Rates 2020–21, Feasibility Expenditure, and Remedial Matters) Bill
Commentary on the proposed amendments
Hon David Parker
Minister of Revenue
The Supplementary Order Paper contains a number of further measures to be added to the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill (the Bill).
The proposed changes:
- Extend the bright-line test that applies to residential property.
- Loosen the loss continuity rules by introducing a business continuity test.
- Turn off the deemed income rule in certain circumstances for donations of trading stock made between 17 March 2020 and 16 March 2022 (both dates inclusive), as a COVID-19 response measure.
- Further improve the administration of the Unclaimed Money Act 1971 to allow Inland Revenue to focus on reuniting owners with their unclaimed funds where there is the greatest likelihood of tracking down the owners.
- Make a number of technical amendments relating to the 39% top personal tax rate introduced in the Taxation (Income Tax Rate and Other Amendments) Act 2020.
The proposed changes would amend the Income Tax Act 2007, the Tax Administration Act 1994, the Taxation (Income Tax Rate and Other Amendments) Act 2020, and the Unclaimed Money Act 1971.
This commentary provides information on the extension to the bright-line test and the business continuity test proposal. Detailed explanations of the other items included in the Supplementary Order Paper will be made available following enactment of the Bill.
Extension of the bright-line test on residential property
The Supplementary Order Paper proposes to extend the bright-line test, which taxes gains from residential property acquired and sold within a specified timeframe, from 5 years to 10 years.
Access to affordable housing is one of New Zealand’s most persistent long-term challenges. The Organisation for Economic Co-operation and Development’s (the OECD’s) Better Life Index 2020 suggests New Zealanders spend the largest proportion of their disposable income on housing costs in the OECD. From 1991 to 2019 (before COVID-19), our house prices had the highest real growth in the OECD at 266 percent. In 2020, the national median house price rose by a further 19 percent, despite COVID-19.
Housing unaffordability is caused by a number of supply and demand-side factors. The proposals in this Supplementary Order Paper are a part of the Government’s response to reduce investor demand for property. Decreasing the tax advantage that property investors can receive will reduce the amount investors are prepared to pay for a given house and the number of houses they will buy. The measure is intended to support first home buyers and help lift New Zealand’s home ownership rates.
Summary of key features
- Extension to bright-line: the Supplementary Order Paper proposes to extend the bright-line test from 5 years to 10 years.
- Amendments to main home exclusion: the exclusion from the bright-line test for the “main home” would no longer apply on an all or nothing basis, but rather apply only for the period the property is actually used as the owner’s main home. A 12-month change of use “buffer” is proposed, within which a change of use to or from the property being the taxpayer’s main home does not need to be accounted for.
- Amendments to the treatment of short-stay accommodation: an amendment to the definition of “residential land” is proposed to ensure property used to provide short-stay accommodation, where the property is not the owner’s main home, cannot be excluded from the bright-line test on the basis it is business premises. This amendment also ensures such properties are subject to the residential rental deduction ring-fencing rules.
- Application date: the 10-year bright-line test and the associated rules referred to above would apply to residential property acquired on or after 27 March 2021 except if the property was acquired as a result of an offer made by the purchaser on or before 23 March 2021, provided the offer was not able to be revoked before 27 March 2021. The amendment in respect of the residential rental deduction ring-fencing rules applies from the 2021–22 income year onwards, regardless of when the property was acquired.
Business continuity test
New Zealand’s current loss continuity rules require at least 49% continuity of ownership of a company for losses to be carried forward to offset future taxable income. This test is an anti-avoidance measure intended to prevent loss trading. However, it can create an impediment for businesses obtaining capital in order to innovate and grow because doing so can breach the 49% threshold. While this is particularly an issue for start-ups, some businesses recovering from the economic impacts of COVID-19 will look to recapitalise and innovate in order to survive.
The Supplementary Order Paper proposes to introduce a business continuity test for loss carry forward into the Income Tax Act 2007. This test would permit a company to carry forward losses as long as there is no “major change” in the company’s business activities for five years after a change in ownership. The core test is supported by specific anti-avoidance measures to ensure that the loss continuity rules are not manipulated in order to loss trade.