Revenue Minister David Parker has couple of months to answer one of more unusual questions of his career: what constitutes a new house.
Consultation has closed on the Government’s housing reforms, which would change tax rules to extend the bright-line test (a tax on profit made if the home is sold) on some homes out to ten years, and to end landlords’ ability to deduct interest expenses from their tax bills.
In both cases, the Government has decided to treat new build homes differently because it wants to encourage people to invest in adding to the country’s housing supply. New builds will be subject to a bright-line test of just five years, and people who built a new home for the purpose of renting it out would still be able to deduct the cost of the interest on their mortgage from their tax bill.
However, the Government still has not decided what constitutes a new build for the purpose of tax – nor when a new build ceases to be new. Now that consultation has closed on the proposals, Parker has a couple of months to decide what he wants the rule to look like. He will likely add the rules as an amendment to routine tax legislation sometime in September.
Deloitte tax partner Robyn Walker said the Government would need to look at how the options it consulted on would increase the supply of housing.
A developer, for example, might “own” a newbuild briefly before selling it to someone who then rents it out.
The developer would never have intended to own the property permanently, but they would need to own it, until it found a buyer. If the ability to deduct interest costs expired when the home was first sold, the home might not end up being built because the buyer would have less of an incentive to purchase the home and therefore the developer would have less of an incentive to build it.
The Government’s current plan is that all “early owners” of a house will get the exemption. An “early owner” is anyone who acquires the property within 12 months of the code of compliance being issued.
What happens next gets a bit more complex. Does the “early owner” get to deduct interest expenses for as long as they own the property?
Walker said this throws up some issues. One proposal that the interest deductibility lasts for 20 years, no matter how many people buy and sell the property in that time.
“It does feel a little bit absurd to call something that is 20 years old a newbuild,” Walker said.
Walker said it looks like the Government is trying to keep people investing in building new homes; as the clock runs down on the period a home can claim a deduction, the owner might be encouraged to sell that home to an owner-occupier and build another new home to claim the deduction for another 20 years.
Another question is what happens to the interest deductions if the landlord moves into their rental property for a period when the exemption would apply.
Walker said the Government needs to decide whether this means the exemption no longer applies if the person later moves out and starts renting the home again. One idea is for the exemption to expire if the owner moves into the property, even if they move out again and begin to rent the property.
“Should a property lose its status as a new build at any point in time? If someone lives in it as owner-occupier it would taint the property and it would lose its newbuild status,” Walker said.
She said the rule could create “potential for disputes”, for example, after one person from a divorced couple briefly moves into their rental property.
National’s shadow treasurer, Andrew Bayly said the whatever the Government decided on it would add unnecessary complexity to the tax system.
“Now you have to make new rules to make the new rules work,” Bayly said.
“New rules that will be put in place to limit the impact of the new rule.”
National would like to do away with the housing changes altogether, allowing interest expenses to once again be fully deductible.
Bayly said that whatever the Government decided National wanted to ensure the rules incentivised new building.
“We need to make sure that these rules do not impinge on the development of new builds because we need those for first home buyers,” Bayly said.
He said he was particularly concerned to make sure the rule changes did not create a disincentive for build-to-rent developments.
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