Predicting a National Coalitions Tax Policy Direction

Many of our clients have reached out, eager to understand the tax implications of the new government and what tax savings could apply to them. As we approach the unveiling of the new Government let’s take a closer look at the key tax policies championed by each coalition partner. The big question is what do the National led coalition tax changes mean for you?

While we can’t provide a definitive answer just yet, we’re here to offer insights into the potential National led coalition tax changes.

Bright-line Test

National’s promise to reduce the bright-line test period has caught the spotlight. Currently, to avoid paying tax when selling a property, investors must hold a new build property for five years or an existing property for ten years. National’s proposed change will cut this period down to two years, starting in July 2024. This reduction could entice first-time investors to enter the market or encourage existing investors to expand their portfolios, given the reduced risk of incurring tax upon selling in the near future. It’s worth noting that Act aims to entirely remove the bright-line test, while NZ First seems to lack a specific policy on this matter.

In our view, the bright-line test serves as a de-facto capital gains tax. New Zealand’s unique position without a capital gains tax system makes it unlikely for the test to be completely scrapped. Thus, the most probable outcome for the coalition to agree on is a reduction of the test period to two years.

Interest Deductibility

NZ First has expressed its intent to “get more private homes built for renters by reinstating interest tax deductibility.” While the exact meaning remains unclear, we assume this entails reinstating interest deductibility for all rental properties, not just new builds. Act wants to swiftly reinstate full interest deductibility for residential rental properties. National, on the other hand, plans to phase in full mortgage interest deductibility over three stages, ultimately achieving 100% interest deductibility by April 2026.

In our assessment, Act’s goal might be realized but could require some patience. Given New Zealand’s financial situation, we anticipate that National’s phased approach to interest deductibility is more likely to be the policy the coalition adopt. This might mean that our residential investor clients will have some additional tax to pay in the short term. However, once interest deductibility is fully reinstated, it will significantly enhance cashflows, improving investors’ capacity to acquire more properties for their portfolios.

Income Tax Brackets

When it comes to income tax brackets, NZ First aims to make the lowest tax bracket (currently $14,000 per annum) tax-free by April 1, 2027. This would provide an extra $28.27 per week for taxpayers. They also intend to adjust tax brackets for inflation starting in 2024, with regular adjustments every three years. National’s plan includes adjusting income tax brackets to account for inflation including Palmerston North, with rates continuing from 10.5% to 39%. Act supports a three-rate system phased in by 2026/27, encompassing rates of 17.5%, 30%, and 33%.

In our perspective, Act’s proposed tax brackets and NZ First’s tax-free threshold may be somewhat optimistic. Therefore, it’s likely that NZ First and National will succeed in adjusting tax brackets for inflation from April 1, 2024.

The proposed tax brackets are as follows:

10.5% up to $15,600
17.5% on $15,601 to $53,500
30% on $53,501 to $78,100
33% on $78,101 to $180,000
39% on $180,001 plus

Clients can expect to pay less tax from this date. The removal of the 39% tax bracket, however, will likely be clarified only by the end of National’s first term. This change will provide taxpayers with relief from ‘tax bracket creep,’ as the brackets haven’t seen inflation adjustments since 2010.

In conclusion

There may be other peripheral tax changes, but these are the key potential National led coalition that could affect you, our clients. While negotiations behind the scenes continue, we eagerly anticipate whether our predictions will prove accurate and tax law changes will result.

Business Like NZ Ltd has been serving the South Auckland area and beyond for over 25 years. If you’d like to discuss how these changes may impact your specific situation, don’t hesitate to reach out to one of our partners at 09 262 0726. We’re here to assist you every step of the way!