Benjamin Franklin wrote that nothing is certain except death and taxes. He might well have revised that statement, however, had he lived to witness the rapidly shifting tax landscape of the 21st century. As New Zealand moves forward into a new tax year, we wrap up some of the key tax changes affecting New Zealand taxpayers this year.
Property taxes
In March, the Government introduced legislation to implement the tax changes signalled in National’s pre-election tax policy document. Ensuing headlines were dominated by the well-anticipated move to reverse property tax changes enacted by the previous Labour government.
One of the more prominent reversals will result in the roll-back of the bright-line test for residential property from 10 years to two years. The roll-back will apply only in respect of properties sold on or after July 1, 2024 which is expected to incentivise sellers to defer selling residential property until after that date. Longer term, however, the relaxing of the bright-line period may reduce the lock-in effect that is associated with the longer bright-line periods. It will be interesting to see whether more properties enter the market as a result.
Interest deductibility for residential investment properties was also subject to a roll-back – this time of rules introduced in 2021 that denied such deductions for property bought on or after March 27, 2021 (with a progressive denial of deductions for other investment properties). The change means affected taxpayers will be able to claim back 80 percent of interest expenses for rentals from April 1, 2024 and 100 percent from April 1, 2025. The phase out begins later than the coalition agreement between National and Act had indicated, with plans to begin the phase out at 60 percent in the year to April 1, 2023 dropped to minimise operational complications for Inland Revenue.
The same package confirmed the removal of depreciation deductions for commercial buildings with an estimated useful life of over 50 years remaining for the 2024-25 and later income years, restoring pre-2020 settings. The move creates an additional tax cost for commercial property investors, by denying a deduction for the very real cost of building depreciation, in order to fund the Government’s overall fiscal package.
The denial of depreciation deductions to commercial property investors, together with the reinstatement of interest deduction to commercial property investors, should ensure that commercial and residential property investments are taxed on a broadly equivalent basis from now.
Offshore gambling tax
In addition to property tax changes, the Government has moved to implement a new 12 percent offshore gambling duty. It will apply to GST-registered persons located outside New Zealand, to the extent that they supply remote gambling services to New Zealand residents, and target profits from this activity on or after July 1 this year. The effect of the offshore gambling duty, alongside the existing GST remote services rules, is to ensure offshore gambling operators pay an overall tax rate of about 25 percent on gross betting revenues. The offshore gambling profits targeted exclude amounts from betting on sports and racing because of an existing requirement to pay a charge to the Department of Internal Affairs in those areas.
Further changes of note
The Government has also elected to proceed with proposed amendments to realign the trustee tax rate with the top marginal tax rate of 39 percent, and to impose GST on transactions made through “electronic marketplaces” (commonly described as the “app tax”).
Submitters to the select committee identified a number of potential problems with the proposed increase in the trustee tax rate, most notably that the increased rate would result in over-taxation for the vast majority of trusts, those with annual income of less than NZ$180,000. Changes were made in response to these concerns, so that the new 39 percent tax rate will apply only to trusts with more than NZ$10,000 of assessable income in a tax year. Trusts with income below this threshold will be subject to tax at the existing 33 percent rate.
Various other changes have also been made to address concerns regarding the detrimental impact of the increased trustee tax rate on some commercial entities, including trading trusts and securitisation trusts, energy consumer trusts and certain Māori trusts.
The position in relation to the app tax on electronic marketplaces has been subject to confusion, with both National and Act indicating before the election that the tax would not proceed under a right-leaning government, only for that position to be reversed in the course of coalition negotiations. The tax on those marketplaces will take effect from April 1 and will require the operators of electronic marketplaces to return GST on transportation and accommodation services provided via those platforms. Previously, GST was only payable if the underlying supplier of the services (eg the driver or the host) was registered for GST.
The app tax is expected to lead to price increases for the users of these services or, if prices remain stable, to reduced income for the underlying suppliers. It is expected that the operators of electronic marketplaces will also incur significant costs in adapting their systems to provide for the new tax, and that those costs will be passed on to consumers in the form of increased prices.
Some uncertainties remain
Tax is set to return to the headlines throughout the remainder of 2024, with Finance Minister Nicola Willis confirming in late March that “meaningful tax reductions” will feature in the Budget on May 30 and highlighting the role tax brackets will play. New Zealanders “have seen no change in personal income tax rates and thresholds since 2010”, she said.
The Government also announced it was moving ahead with a tax rebate of up to NZ$75 a week on childcare costs in late March, a policy that was central to tax relief plans outlined by National before the election. Questions remain regarding the practical implementation of the policy and in particular, whether the requirement for parents to upload childcare invoices via Inland Revenue’s online portal may prevent some families (especially low-income families) from accessing the rebate.
Significant uncertainties also remain on the international tax front. The OECD is continuing its work on the “Pillars” project, which is intended to address certain features of existing tax rules that enable large multinational enterprises to minimise their global tax burden. However, the OECD has faced strong pushback from the US to core elements of the proposed reforms.
The Pillars project continues in the context of moves by many countries to introduce or consider a unilateral digital services tax. New Zealand, like a number of other countries, has committed not to introduce a digital services tax before January 1, 2025 to allow time for a multi-country solution to taxing the digital economy through the Pillars project . However, if the Pillars project is ultimately unsuccessful, then attention will turn to the Digital Services Tax Bill, which is currently before Parliament.
If implemented, the digital services tax would impose a 3 percent tax on New Zealand-sourced “digital services revenue” derived by large multi-national entities. Previous attempts by European countries to introduce digital services taxes have led to retaliatory action by the US. Parliament will need to carefully weigh the potential revenue gains to New Zealand against the possibility of US reaction.
