Key Facts

  • The new coalition government plans to reintroduce the ability for property investors to deduct the interest costs on their mortgages against their rental income.
  • Criticisms regarding proposed changes focus on its retrospective nature, potential windfalls for landlords at the expense of tenants, and fiscal cost.
  • The previous government’s law was said to be punishing to landlords and didn’t deliver the anticipated improvement in housing affordability.
  • Alongside reinstating interest deductions, the government also plans to reduce the applicable period of the brightline test from ten years to two years.
  • In 2021, Labour’s changes meant landlords couldn’t offset interest payments against their rental income, a move said to address housing affordability but resulted in increased rents.
  • Proposed changes to policies aim to fix fundamentally flawed laws and restore coherence in the tax system.

Article Summary

The New Zealand coalition government is set to reform its tax laws, including reinstating a policy that allows property investors to deduct interest costs from their mortgages against rental income. The proposed changes are being criticised due to their retrospective nature, potential benefits for landlords at the cost of tenants, and the fiscal implications of the policies.

The Labour government, in 2021, rolled out plans to phase out deductions of interest against property-related income. The policy aimed to reduce investor demand to manage housing affordability. However, this policy seems to have resulted in increased rents, and a tangible impact on investor demand remains uncertain. Over the past two years, despite credit tightening and economic concerns, the property market has seen a slowdown.

The suggested policy changes by the new government face criticism, primarily due to their retroactive nature, tendency to favour property investors, and the fiscal load it places on government coffers. However, they also seek to eliminate fundamentally flawed laws. Inland Revenue had advised against the denial of interest deductibility in 2021, citing the negligible impact on housing affordability and increased pressure on rental prices.

Removing deductions on interest expenditure is a significant deviation from the principle that costs associated with producing taxable income can be offset. This measure degrades the comprehensiveness of the tax structure. Despite this, it’s unlikely the new government will put forward a comprehensive capital gains tax, which would otherwise enhance the coherence of the country’s tax system.

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