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2022 changes to property tax and trusts - for Māori customers Video information

Audio and visual transcript

Slide 1 

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2022 changes to property tax and trusts

March 2022 

The information in this presentation is current as at March 2022 

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There is no audio for this slide.


Slide 2 

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Purpose 

2022 changes to property tax and trusts

Topics 

  • Trusts
  • Property tax

Audio

Kia ora Koutou,

Ko Rata Kamau toku ingoa

He Kaiwhakahaere Hononga ā-waho tōku tūnga mahi –

Kei Te Tari Taake au e mahi ana.

Greetings everyone, my name is Rata Kamau and I am an Account Manager for Inland Revenue.

Welcome to this presentation where we introduce some of the changes Inland Revenue is making this year.

Last year, the Minister of Revenue introduced the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill.

The Bill introduces an assortment of proposed changes which are expected to take effect on or before the 1st of April 2022. There are also a number of other legislative changes which will come into effect from April too. In total, there will be more than a hundred policy and remedial changes – we’re calling these the 2022 Annual Changes.

Now in this presentation I’ll be going through the changes for trusts and property.


Slide 3 

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Title:  Ngā rōpū kaitiaki

Trusts

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First, let’s take a look at the changes that are coming in for Trusts.


Slide 4 

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Title: Additional reporting requirements 

Trustees will be required to provide: 

  • financial summaries as part of their annual IR6 returns.
  • information about settlements, settlors, beneficiaries, distributions and persons with power of appointment for the trust. 

Note: the new requirements apply from the 2021-22 tax year onwards.

Audio

From the 1st of April 2021, trusts will be required to provide financial summaries as part of their IR6 annual returns. 

Trusts will also be required to provide information about settlements, settlors, beneficiaries, distributions, and persons with powers of appointment for the trust.  

This includes: 

  • financial summaries with a statement of profit or loss as well as a statement of financial position. 
  • the details of any person who has made a settlement on a trust, as well as the amount and nature of any settlement made from 1 April 2021. 
  • the details of any person who has received a distribution from a trust and the amount of the distribution. 
  • the details of people who have the power to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed. 

The new requirements apply from the 2021-22 tax year onwards.


Slide 5 

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Title: Exemptions

Any trust that makes income in a year must provide additional disclosures, unless they fall under one of the following categories:

  • Eligible to be a Māori authority 
  • Non-active trust 
  • Foreign trust 
  • Charitable trust 
  • Widely-held superannuation fund 
  • Employee share scheme 
  • Debt funding special purpose vehicle 
  • Energy lines trust 

Audio

Any trust that makes income in a year must provide additional disclosures, however if your trust falls under one of the following categories, you will not be required to provide additional disclosures for that year: 

  • eligible to be a Māori authority 
  • non-active trust 
  • foreign trust 
  • charitable trust 
  • widely-held superannuation fund 
  • employee share scheme 
  • debt funding special purpose vehicle, and 
  • energy lines trust.

Slide 6 

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Title: Exemptions

Trusts that do not derive income are encouraged to complete a non-active trust declaration. 

An Estate that has estate property held on trust will be required to comply with the new rules.

Audio

Trusts that do not derive income are encouraged to complete a non-active declaration to remove the requirement to provide an income tax return. 

This can be submitted through myIR, or you can fill in our Non-active trust declaration form, the IR633.

Estates are not trusts by definition. However, an estate that has progressed to a point that estate property is held on trust will be required to comply with the new disclosure rules. 


Slide 7

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Title: Ngā rawa

Property

Audio

Now let’s take a look at the bright-line and interest deductibility changes for property.


Slide 8

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Title: 10-year bright-line rule

Bright-line property rule has been extended to 10 years.

Applies to properties purchased on or after 27 March 2021.

Residential properties may be subject to income tax on any profit made, if sold within 10 years.

Audio

The bright-line property rule has been extended to 10 years for properties purchased on or after the 27th of March 2021.

This means residential properties may be subject to income tax on any profit made on the sale of the property if sold within 10 years of being acquired.


Slide 9

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Title: 5-year bright-line rules

A shorter bright-line period of 5 years is expected to be introduced for new builds.

Applies for the initial owners.

New builds purchased off the plans and new builds constructed on land already owned will also qualify for the 5 year bright-line period.

Audio

However, a shorter bright-line period of 5 years is expected to be introduced for new builds.

This means if someone purchases a new build property, a bright-line period of 5 years will apply, as opposed to the recently enacted 10 year bright-line period I just spoke about. 

The 5-year bright-line period applies for the initial owners who have acquired the completed new build within 12 months after the Code Compliance Certificate is issued under the Building Act 2004.

New builds purchased off plans and new builds constructed on land already owned will also qualify for the 5 year bright-line period, provided these new builds receive their Code Compliance Certificates by the time the land is disposed of.


Slide 10

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Title: Main home exclusion

There are changes to the main home exclusion where a main home and rental property are on the same land:

  • If the main home is >50% of the land, it will be excluded from the bright-line property rule.

  • If the main home is <50% of the land, any gain on sale will be apportioned between the main home (untaxed) and the rental property (taxed).

Audio

There are changes to the way bright-line applies to the main home when there is another dwelling for investment purposes on the same land as the main home.

Where the main home is over 50% of the land, the existing main home exclusion continues to apply in the same way. 

If the main home is under 50% of the land, any gain made on the sale of the property is apportioned between the main home and the rental property. The main home portion will not be taxed. 

When a property is not used as the main home for periods of more than 12 consecutive months, the time apportionment rule applies regardless of whether the main home takes up more or less than half the land. This rule ensures that tax is paid on those periods of non-main home use.

To find out whether a property is likely to be taxable under any of the property rules, you can use the property tax decision tool on myIR – this will be updated once the legislation has passed. 


Slide 11

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Title: Limiting interest deductibility

Income year Claimable interest
1 April 2020 - 31 March 2021 100%
1 April 2021 - 30 September 2021 100%
1 October 2021 - 31 March 2022 75%
1 April 2022 - 31 March 2023 75%
1 April 2023 - 31 March 2024 50%
1 April 2024 - 31 March 2025 25%
1 April 2025 onwards 0%

Ability to claim interest on loans for residential property as an expense is being phased out.

For residential property acquired on or after 27 March 2021, interest will be denied as an expense from 1 October 2021, unless an exclusion or exemption applies.

For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025.

Audio

The ability to claim interest on loans for residential property as an expense is being phased out.

These new interest limitation rules are expected to be passed into law by the 31st of March 2022 and will be backdated to apply from the 1st of October 2021, as outlined by the Government in March 2021.

For residential property acquired on or after the 27th of March 2021, interest will be denied as an expense from the 1st of October 2021, unless an exclusion or exemption applies.

For property acquired before the 27th of March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending the 31st of March 2025.

This table shows how the phasing will work.

As you can see interest is fully deductible until the 30th of September 2021,

Then from the 1st of October 2021 to the 31st of March 2023 only 75% of interest is deductible, and so on.

And then finally from the 1st of April 2025, no interest will be deductible.


Slide 12

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Title: Limiting interest deductibility

Interest on new loans drawn down on or after 27 March 2021 will not be deductible.

Special rules will apply for:

  • Refinanced loans

  • Interest on revolving credit

  • Overdraft facilities

Any interest on borrowings above the closing balance on 26 March 2021 will not be deductible.

If the property is taxable when sold, the previously denied interest may be added to the cost of the property to reduce the taxable gain.

Audio

Interest on any new loans drawn down on or after the 27th of March 2021 will not be deductible.

Special rules will also apply for refinanced loans and for interest on revolving credit and overdraft facilities. Any interest on borrowings above the closing balance on the 26th of March 2021 will not be deductible.

If you sell or dispose of a residential property and the sale is taxable under the bright-line property rule, you’ll be able to add the amount of the interest previously denied under the interest limitation rules to the cost of the property to reduce the taxable gain.

If this results in a loss, the loss must be ring-fenced and can’t be used to offset income from other sources like salary and wages. 


Slide 13

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Title: Exemptions and exclusions

The proposed new interest limitation rules will apply to properties that are suitable to be used for long-term residential accommodation.

Some types of residential accommodation will be excluded from the rules. 

Audio

The proposed new interest limitation rules will apply to properties that are suitable to be used for long-term residential accommodation. This is because the purpose of the rules is to discourage investment in property that could be purchased as a long-term residential property.

As such, some types of residential accommodation will be excluded from the interest limitation rules - the legislation lists and defines these properties.

The list includes:

  • the main home, when it is used to earn income
  • business premises
  • farmland
  • certain Māori land, like Papakāinga and Kaumātua housing
  • emergency, transitional, social and council housing
  • commercial accommodation like hotels and motels
  • care facilities, rest homes and retirement villages
  • employee accommodation
  • student accommodation, and
  • boarding establishment

This is because these types of properties are generally unsuitable for use as long-term accommodation or for first home buyers.

Interest can be claimed for loans where the property is used for emergency, transitional or social housing when leased to the Government or to a registered community housing provider.

There are also 3 other exemptions from the interest limitation rules. These are land businesses, residential developments, and new builds. We’ll look at these in more detail now.


Slide 14

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Title: Māori title land

Certain Māori title land is not subject to interest limitation, along with certain land owned by Māori authorities. The following are exceptions:

  • Māori customary land, Māori freehold land, Crown land reserved for Māori, and land set aside as a Māori reservation
  • Land transferred as part of a Treaty settlement or a post-Treaty settlement mechanism, where the land is held directly or indirectly by a Māori authority or an entity eligible to be one 
  • Certain papakāinga and kaumātua housing

Audio

Certain Māori title land is not subject to interest limitation, along with certain land owned by Māori authorities. A lot of this land is unlikely to be residential property to begin with, but the exceptions put any uncertainty beyond doubt. 

  • Māori customary land, Māori freehold land, Crown land reserved for Māori, and land set aside as a Māori reservation – these terms are as defined in Te Ture Whenua Māori Act of 1993 

  • Land transferred as part of a Treaty settlement or a post-Treaty settlement mechanism, for example a right of first refusal where the land is held directly or indirectly, for example through a subsidiary, by a Māori authority or an entity eligible to be one 

  • Certain papakāinga and kaumātua housing:

  • housing on land owned directly or indirectly, for example through a subsidiary, by a Māori authority or entity eligible to be one where that housing is provided to a shareholder or beneficiary of that Māori authority (or eligible entity)

  • this is intended to cover housing provided to whānau, hapū or iwi depending on who the Māori authority represents. 

For more information, see ‘Māori excepted land’ in the upcoming IR 264. 


Slide 15

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Title: Māori authorities

Many Māori authorities or companies wholly owned by a Māori authority won’t be subject to interest limitation.

The interest limitation rules will only apply if more than 50% of their assets are types of residential property subject to the rules.

This includes entities eligible to Māori authorities where that election has not been made. 

Audio

Many Māori authorities or companies wholly owned by a Māori authority won’t be subject to interest limitation.

The interest limitation rules would only apply if more than 50% of their assets are types of residential property subject to the rules.

This includes entities eligible to Māori authorities where that election has not been made.  

For more information, see ‘exempt Māori company’ in the upcoming IR264. 


Slide 16

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Title: Exemptions

The land business exemption applies for interest relating to land held as part of a business which develops, subdivides, or deals in land, or which erects buildings on land.

You may qualify for the development exemption if you carry on a one-off development and you develop, subdivide, or build on land for the purpose of creating a new build.

The new build exemption will apply to the initial owners and any subsequent owners for 20 years from the date of the CCC.

Audio

A land business exemption applies for interest relating to land held as part of a business which develops, subdivides, or deals in land, or which erects buildings on land.

Interest relating to remediation work and other expenses from ownership and development of the land will also qualify if this exemption applies.

Now let’s take a look at the development exemption.

If you carry on a one-off development and you develop, subdivide, or build on land for the purpose of creating a new build, then you may qualify for the development exemption.

The development exemption starts when your development, subdivision, building scheme or undertaking commences (using existing tax law). It ends when the dwelling’s Code Compliance Certificate is issued, and then you transition to the new build exemption.

Even if the exemption applies, interest is only deductible if a deduction is allowed by general tax rules.

Interest relating to remediation work done to an existing property that is not significant enough to create a new build will not qualify for this exemption.

The new build exemption will apply to the initial owners and any subsequent owners for 20 years from the date of the Code Compliance Certificate

A new build is a self-contained residence that is added to land, with a Code Compliance Certificate issued on or after the 27th of March 2020.

This will include:

  • dwellings added to residential land
  • existing dwellings that are converted into multiple dwellings, and
  • dwellings converted from a commercial premises or a hotel or motel.

Slide 17

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Title: Residential income definition

The definition of ‘residential income’ will include income that a person derives from a foreign currency loan to finance residential rental property.

Audio

One further change that relates to property is the change to the definition of residential income

From the 1st of April 2022, the definition of ‘residential income’ will include income that a person derives from a foreign currency loan to finance residential rental property.

This is to fix the problem where foreign exchange loss is included as residential rental deductions whereas foreign exchange gain is not able to be used to offset against the loss. 


Slide 18

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Title: Kaitakawaenga Māori

Kaitakawaenga Māori have been in place since 1990.

We deliver in a whānau, hapū and iwi-centric way.

We consider our Māori customers in all areas of our work.

Audio

That brings us to the end of our presentation.

Now, we understand that for many our whānau, engaging with us, Te Tari Taake Inland Revenue, is best done kanohi ki te kanohi, face-to-face. For those whānau who need it, our Kaitakawaenga Māori deliver Inland Revenue services in a whānau, hapū and iwi centric way to ensure our Māori customers have the tools to self-manage your tax affairs whether you are an individual, or in business.

Our Kaitakawaenga Māori advisors can:

  • provide one-to-one tax advice and information
  • provide tax training and seminars to Māori groups
  • provide tax agencies at resource centres or marae
  • supply information booklets on a range of different tax obligations.

For more information on our Kaitakawaenga Māori service and other resources visit our Māori landing page www.ird.govt.nz/maori

Māori

If you need assistance, best done kanohi ki te kanohi, I would encourage you to go to our website and request our Kaitakawaenga Māori to make contact, and support you .


Slide 19

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Title: Kia ora

Thank you

View our other webinars at www.ird.govt.nz/2022-changes

Changes coming in 2022

Send questions to [email protected]

Audio

If you want to find out more about the upcoming changes, or view our other webinars visit www.ird.govt.nz/2022-changes

If you have any questions about our webinars, please send them to [email protected]

Thank you for taking time out of your day to listen to this presentation, Ka kite anō. Bye for now.

Last updated: 27 Mar 2022
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