National finance spokeswoman Nicola Willis presents the highlights of the tax plan announced yesterday.
National has clarified it wouldn’t exempt new builds from the bright-line test, should it be elected to govern.
It is pledging to soften the de facto capital gains tax, without giving investors in newly built residential property preferential treatment.
National’s finance spokesperson Nicola Willis made the clarification after seemingly gettingher wires crossed on the matter.
Currently, investors who buy and sell existing houses within 10 years have to pay income tax on any gains received. Meanwhile, gains received by investors who on-sell new builds within five years of purchase are taxed.
National is pledging to require investors who buy and sell any type of home within only two years to pay tax on any gains received.
While the party had said it wanted to return the rule, aimed at preventing people from flipping homes, to what it looked like when National introduced it in 2015, the Herald sought to double-check whether new builds definitely wouldn’t receive preferential treatment to encourage more home building.
Willis was unsure when the question was put to her during a stand-up with media last Thursday, which was mainly dedicated to discussing the newly released GDP figures.
Nonetheless, she texted the Herald soon after to say new builds would be exempt. She agreed this would make the bright-line test look a bit different to when National was last in government.
The following day, the Herald emailed National to ask it to elaborate on how it would calculate the bright-line period, noting a different approach is currently used to that which was used in the past.
The Herald then sent a follow-up email asking whether National would need to put more money aside than outlined in its tax policy document to account for the new build exemption, as the document didn’t mention there being one.
Willis then promptly called to confirm there had been some miscommunication and National would in fact treat new builds the same as existing property, as it did when it introduced the bright-line test. So new builds wouldn’t be exempt.
National has clarified it wouldn’t exempt new builds from the bright-line test, should it be elected to govern. Photo / Bevan Conley
National has committed to ensuring the two-year bright-line test would take effect by July next year.
Because the Labour-led Government extended the bright-line test on two occasions, different investors currently have to adhere to different tax rules depending on when they bought or sold property.
Some may have to pay tax on gains at the top income tax rate of 39 per cent, while others, including those who bought property before October 2015, aren’t taxed under the rule at all.
There would be even further differentiation if National changed the rules again.
National is also proposing to phase out the interest limitation rule, which the current Government plans to have completely phased in by April 2025.
In March 2021, when the property market was overheating, the Government committed to gradually stopping investors in residential property (except for new builds) from writing off interest as an expense when paying tax.
This rule, which hits investors’ cashflows, was aimed at tilting the property market more in favour of owner-occupiers. Indeed, they can’t write off their mortgage interest as an expense when they pay tax on their salaries or wages.
National is committing to progressively reversing this, so that property investors can eventually deduct all their interest as an expense by April 2026.
Like under the bright-line test, the interest limitation rule sees different investors face different tax bills depending on when they bought their property.
National estimates reversing the interest limitation rule would save investors/cost the Crown $650 million a year by 2026-27.
Meanwhile, bringing the bright-line test back to two years would save investors/cost the Crown $50m a year.
Accountants admit the web of property rules are confusing, and therefore costly for investors to decipher.
Investors have retreated from the property market more than existing owner-occupiers and first-home buyers since the Government introduced the interest limitation rule and extended the bright-line test from five to 10 years for existing properties in 2021.
But, because these changes coincided with the Reserve Bank lifting interest rates and reinstating loan-to-value ratio restrictions at tough levels for investors, it’s difficult to isolate the impact of the tax changes.
In early-2021, investors accounted for about a quarter of the new mortgages issued by banks. Meanwhile, first-home buyers accounted for about 17 per cent.
Those two portions have since flipped, with first-home buyers currently making up a record portion of a smaller pie of mortgage lending.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
