New Zealand housing investment tax changes explained

With housing costs in New Zealand rising rapidly (up 23% in just 12 months), the New Zealand Government has introduced reforms intended to reduce incentives for housing investors while increasing the supply of new housing.

What exactly are the reforms being introduced in New Zealand and are there any lessons for Australia as house prices here continue to soar, even after the worst of the coronavirus pandemic?

What are the NZ reforms?

The changes are:

Residential property acquired on or after 27 March 2021 has to be held for 10 years (rather than 5 years previously) if profits on the sale price (when the property is sold) are to be excluded from being taxed (i.e. there is no capital gains tax for investment properties held for over 10 years). Property that was the seller’s main home, was inherited or was from a deceased estate property is exempt from being taxed. [This is known as the bright-line property rule and does not apply to properties acquired before 1 October 2015.] People and businesses that trade in property—that is, buying and selling frequently for a profit—will continue to have resale profits taxed as part of their income.
Investors can no longer claim interest deductions for buying an existing residential investment property acquired on or after 27 March 2021. For investors who bought before that date, interest deductions will phase out over the next four years to 1 April 2025.
New builds will be exempt from the bright-line property 10 year period, and will only have to be held for 5 years for capital gains on resale to not be considered as taxable income for investors. The NZ Government is still to decide whether interest deductions for investors will be available for new builds.
From May 1 the Reserve Bank of New Zealand is only allowing most investors to borrow up to 60 per cent of a property’s purchase price. Lenders will be able provide a maximum of 5 per cent of new mortgage lending to investors who have a deposit of less than a 40 per cent.

The New Zealand Government is encouraging first home purchasers with increases to first home owners’ grants. The First Home Grant is available to eligible KiwiSaver members buying a first home. The grant is between $3,000 and $5,000 for existing properties, or $6,000, $8,000 or $10,000 for new properties. People buying together can also combine their First Home Grants to put towards the purchase of the same property. The Government is also lifting the house price caps for both new properties and existing properties and raising the income caps for single people to $95,000 and for two or more people to $150,000. The increases in house price caps are location dependent, with some examples being:

	New builds		Existing property
Region	Current Cap	New Cap	Current Cap	New Cap
Auckland	$650,000	$700,000	$600,000	$625,000
Wellington City	$550,000	$650,000	$500,000	$550,000
Nelson City	$550,000	$600,000	$500,000	$525,000
Dunedin City	$500,000	$550,000	$400,000	$425,000

In Australia, while there is ‘considerable academic and policy consensus’ that targeted tax reforms can improve housing affordability, governments have had limited success in implementing changes due to ‘the difficulties of coordinating reform across the federation and perceptions that policy change in this area will produce significant electoral backlash.’

Are there lessons for Australia?

Whether these changes will reduce house prices in New Zealand by inhibiting investor demand while at the same time keeping rents affordable remains to be seen. Any lessons Australia might take from these changes to investment tax laws should be understood in the context of the differences in the tax laws between New Zealand and Australia. For example, property transfers in New Zealand are not subject to stamp duty, which is not the case for most transfers in Australia (ACT is currently phasing out stamp duty for residential properties and NSW is exploring reform options), and Australian investment properties are subject to a capital gains tax (reduced to being on 50 per cent of any profit if the property is held for more than a year).

Apart from having no general capital gains tax or property stamp duty, New Zealand taxpayers pay no local or regional taxes (property owners do have to pay rates to councils and local authorities); no payroll tax; and no general healthcare tax. They do pay income tax on earnings and a flat rate Goods and Services Tax of 15 per cent (in Australia GST is 10 per cent).

In Australia, while there is ‘considerable academic and policy consensus’ that targeted tax reforms can improve housing affordability, governments have had limited success in implementing changes due to ‘the difficulties of coordinating reform across the federation and perceptions that policy change in this area will produce significant electoral backlash.’ Maybe, despite the differences in tax regimes, any success in making housing more affordable in New Zealand will encourage appropriate reforms in Australia. In light of this, AHURI research has proposed a ‘ coordinated, staged program of housing tax reforms ’ to improve the affordability of Australian housing.