Two decade exemption for new builds in tax change meant to deter property investment

New build properties and purpose-built rentals will get a two decade exemption in a tax change meant to deter property investment, described as a "tax grab" by the Opposition. 

A property that received its code compliance certificate after March 27 this year will be eligible to deduct interest for up to 20 years from the time the property's code compliance certificate was issued. 

The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20 year period. It will also be applied to purpose-built rentals.

The Government announced in March a raft of changes to try and bring down property prices, including removing tax deductions on interest costs for rental properties, because property investors made up the biggest share of buyers in the housing market.

To further reduce the incentive to invest in property, the Government increased the bright-line test - income tax paid on any gains from residential property - from five years to 10 years. 

The interest deductibility rules come into effect on Friday and the Government has been criticised for releasing details of the policy exemptions only a few days prior. 

"The process from Labour has been shoddy to say the least," said ACT's housing spokesperson Brooke van Velden.

"Introducing details just days before this comes into effect is poor policymaking in the extreme. Once again Labour has caused uncertainty for New Zealanders and reverted to a new tax - the only policy solution it knows."

A dumping of documents related to Budget 2021 in August showed Treasury predicted the change could generate tax revenue of up to $800 million or more. 

National MP Andrew Bayly urged the Government to ditch the policy after Inland Revenue advised against it. It said additional taxes on rental housing is unlikely to be an effective way of boosting housing affordability. 

Finance Minister Grant Robertson acknowledged that tax is "neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government's overall response". 

Prime Minister Jacinda Ardern and Revenue Minister David Parker.
Prime Minister Jacinda Ardern and Revenue Minister David Parker. Photo credit: Getty Images

Revenue Minister David Parker said the proposals, including the way the new build exemption would be applied, had been subject to public consultation since the announcement in March. 

"We want to curb investors' appetite for existing residential properties but also want to stimulate investment in new housing. That's why we're also proposing an exemption for property development and for new builds, allowing interest deductions in full."

Housing Minister Megan Woods said she's seeking advice on whether there should be an extension beyond the 20 year period for purpose-built rentals because she views it as "an emerging area and one where we see real potential to meet gaps in our rental market".

Parker said that generally speaking, private residential investment properties capable of being used for long-term accommodation would be subject to the rules.

"Hotels, for instance, would not be affected by these rules as they are set up to provide short-term and not long-term accommodation. The owner-occupier of a house with flatmates would not be affected either."

The intent of the policy is to boost New Zealand's lagging housing supply and help first-home buyers get into the market. 

Real Estate Institute data from August showed residential property across the country increased by 25.5 percent in the space of a year, from $677,400 in August 2020 to a record $850,000 in August 2021. 

Real Estate Institute data from August showed residential property across the country increased by 25.5 percent in the space of a year.
Real Estate Institute data from August showed residential property across the country increased by 25.5 percent in the space of a year. Photo credit: Getty Images

Rents also remain out of reach for many Kiwis, according to the latest data from Trade Me. New Zealand's national median weekly rent remained at an all-time high of $550 per week in August. 

CoreLogic's recent Housing Affordability Report showed affordability was "as bad as it's ever been" with the average property value across New Zealand 7.9 times the average annual household income, a record high in its 18-year history.

There is hope on the horizon. Estimates from Stats NZ released in July showed the number of new homes consented in the year ended May was at an all-time high of 43,466 - an increase of 17 percent. 

The Reserve Bank last week confirmed it will go ahead with plans to increase loan-to-value restrictions on owner-occupied home loans, meaning banks will be restricted in how much they can lend to low-deposit borrowers. 

The Reserve Bank said it was alarmed at the speed of house price increases. But there are concerns the central bank's move could impact the ability for first-home buyers to get into the market as they often have lower deposits. 

Investors already face a tighter restriction. Banks can only lend 5 percent of new loans to investor borrowers with less than 40 percent deposit.