March has become April, and just like that the 31st March 2021 financial year came to an end and just like that, we started a new one! I think it’s safe to say that the year seems to be sailing past - on foils. March has become April, and just like that the 31st March 2021 financial year came to an end and just like that, we started a new one! I think it’s safe to say that the year seems to be sailing past - on foils.
There have been a range of changes that have been announced or come into effect recently. Here’s a quick update of what they are and how they could impact you:
The top individual income tax rate increased to 39% from the 1st of April 2021. This means that for all income over $180,000 for individuals, this is now taxed at the rate of 39%. This will have implications for you if you are on a high salary in paid employment but it could also impact you if you are a shareholder in a company in your personal name. To find out how this affects you, get in touch with us here.
On the 1st April 2021 the minimum wage increased from $18.90 to $20.00 per hour for adults. There were also changes to the starting-out and training minimum wages, which increased from $15.12 to $16.00 per hour. If you are an employer, you need to ensure your payroll systems and processes have been updated.
For advice around payroll systems or for a broader discussion around how this impacts your business and cashflow, contact our team.
Government property changes
Last month, the Government announced their new housing policies.
- Interest deductions no longer allowed on residential investment properties
Up until now, residential investors, just like other New Zealand businesses have been able to offset the income they receive from their investment properties (rent) with any interest expense related to that property (interest on bank loans). These deductions will no longer apply from 1 October 2021 on residential investment property purchased on or after 27 March 2021.
If you purchased your residential investment property before 27 March 2021, you can continue to claim interest as an expense – with a catch. The amount you can claim will reduce over the next four income years by 25% each year until it is completely phased out. Property developers are not affected by this change, and they can continue to claim interest as an expense.
- Bright-line changes
Bright-line testing came into effect back in October 2015 originally for a period of two years before being amended to five years for houses bought and sold between 29 March 2018 and 26 March 2021. Now bright-line testing has been amended again – this time for property acquired on or after 27 March 2021, and then sold within 10 years.
So, what is bright line? Essentially this is a capital gains tax in a tutu, although historically it used to clearly exclude the family home and any inherited property. When bright line applies to a property, then you could be required to pay income tax on any profit made through the property increasing in value at sale time.
What about my main home? Historically, the main family home was excluded from this legislation and for those properties that remain the main home for the entire time it is owned – this exclusion still stands. However, for residential properties purchased on or after the magic date of 27 March 2021 the Government intends to introduce a ‘change of use’ rule. This will impact the way tax is calculated if you do not use the property as your main home for a period of 12 months or more. If this is the case, it is likely income tax will need to be paid on the profit made through the sale of the property proportionate to the amount of time the property was not used as the owner’s main home.
What about new builds? There is some favouritism toward properties that are new builds (although what exactly constitutes a new build is still being discussed). For those properties that were purchased after 27 March 2021, and are classified as a new build, then the five year bright line test applies (not the 10 year).
What else do you need to know? It’s important to remember that bright line can be reset at the transfer of ownership of a property. For example, if you were planning to move the property ownership into a trust or a company for risk protection and planning – then this resets the property transfer date and can take a property that is well out of bright-line, into bright-line. If you were thinking about restructuring your assets for future proofing or other reasons, it might be time to have a chat about it.
Our 2 cents
These property changes have been sold as a method to cool the ‘hot’ property market and make it more realistic for first home buyers to get into a home. What seems to have been left out of consideration is the impact these changes will have on renters. It simply isn’t realistic to think that all people want to own their own home. For some it isn’t a reality and for others it just doesn’t appeal. The changes to interest deductions for residential investors will likely cause an increase in rents in order to cover the additional tax required to be paid. Not an outcome the Government wanted we're sure.
The extension to the bright line test to 10-years means that every property purchase will likely take more consideration. It also means that more planning is needed before signing sale and purchase agreements to ensure you are setting up the right structure for the future. Ultimately, each individual property investor will be impacted differently depending on their property purchase date(s), long term plan, and financial position.
If you want to understand how this impacts you and your future planning, then get in touch.