There are some important tax changes coming in from 1 April, but frustratingly, we are one month out from most of these changes applying, and the full detail of these changes is not yet in the public arena.
Officially, the Select Committee is not reporting back to parliament until the 29th of March. However, certain media sources had suggested that the report would be issued on the 28th or 29th of February, but this did not occur.
Trust tax rate
As we previously speculated, the increase in trust tax rate to 39% that was announced by the prior government is proceeding from 1 April 2024. However, we understand that some important changes are yet to be announced.
We understand that the 39% threshold will only apply if the trust has a certain level of taxable income. Rumours are that the threshold for application could be as high as $100k in income. We understand that this will not be a separate rate of 33% up to the threshold and then 39% beyond. Instead, it will be all or nothing, i.e. the rate will be 33% for “low income” trusts or 39% for “high income” trusts. At this stage, we do not know whether the threshold will be calculated before or after trust distributions and this is a crucial detail.
National have signalled that if they are re-elected then the 39% rate for trusts and individuals is likely to be reduced in the next term, assuming that economic conditions allow. I am not sure that we will see a return to 33% anytime soon – a top tax and trust rate of 35% or 36% seems more likely.
Bright-line
It was confirmed before Christmas that bright line is changing back to two-years from 1 July 2024. We also know that this effectively going to be a retrospective change rather than being phased in. In other words, from 1 July 2024, the two-year bright line will apply to all properties, meaning properties purchased before 1 July 2022 will not be subject to bright lines.
We are glad that the rules are going to be changed in one sweep as this will mean that all properties will be subject to one rule regardless of their purchase date. This is a big improvement over the mess that has resulted from past changes.
We are aware that there are numerous investors out there who want to sell properties to reduce their debt, but the bright line rules have locked them into ownership. The
retrospective change will allow some of these properties to be sold without major tax implications.
What is missing right now is the detail on how this will work. Specifically, will agreement date (to sell) or settlement date be the driver for the 1 July 2024 date. In the existing framework, it would be agreement date this relevant as existing brightline period runs from settlement date on purchase to agreement date on sale.
Interest deductibility
We know from the announcement just before Christmas that interest deductibility for residential rental properties is going to be phased back in from 1 April. More specifically, 60% of the interest will be claimable for those who have currently been subject to the interest phase out rules.
What we don’t know is what will happen to interest deductibility for properties that were purchased after 27 March 2021 where the owners are currently not allowed any interest deductions. Our hope/expectation is that interest will be allowed at the phase in rate of 60% from 1 April for all properties (other than new builds), but that is to be confirmed. Having all properties (except for new builds) under the same rules would be a much-welcomed simplification as this space is unnecessarily complicated right now.
We assume that interest will remain fully deductible for “new builds” in all cases.
App – Tax
From 1 April 2024, changes are set to apply for GST on certain transport and accommodation services supplied through digital providers (apps or websites). These rules often referred to as the “App-Tax” or “Uber Tax” or “AirBNB tax” are to apply where the underlying service provider (the Uber driver or property owner etc) is not registered for GST.
Under current rules, no GST is charged by the accommodation or transport service organiser where the underlying service provider is not GST registered. From 1 April 2024, the digital provider will now have to charge and account for 15% GST on all supplies that are made through their app or website irrespective of the GST registration status of the underlying service provider. The service provider will claim a credit of a notional amount of 8.5% against the 15% GST leaving 6.5% of the supply amount being paid to Inland Revenue.
Before the election, National and ACT had promised to repeal these changes. However, they have not followed through on that promise, and it now seems that the changes are going to come into force. It is very unhelpful that there has not been any official announcements around this, although as it is already in law, technically no announcement is required.
However, it is the digital services provider that is going to need to change their systems to account for this change. Also, there are no additional filing requirements for the unregistered service supplier. Therefore, there are no specific actions required by the non-registered service supplier. However, the unregistered supplier will be impacted by receiving less money in the hand. In the case of properties being listed on the likes of AirBNB or similar, the owners will need to contemplate whether they increase their prices to cover the loss of a GST portion.
Depreciation on commercial buildings
Depreciation is expected to be removed from commercial buildings from 1 April 2024.
This, in itself, is a simple and easily actionable change. The complexity arises around the fringes. For example, last time depreciation was removed from commercial buildings, some additional rules were introduced around the treatment of building fitout that was not split from the building. There has been no mention about whether there will be anything similar this time around.
Tax cuts for individuals
The other certainty is that there will be tax cuts for individuals from 1 July 2024 by way of threshold changes. Again, this in itself is simple and again the unknowns and complexities arise around the fringes.
The major unknowns are whether composite rates will apply as the tax cuts are occurring mid-year and whether the provisional tax uplift rates will be altered for next year. I think that the tax cuts are too small to warrant any changes to provisional tax, but composite rates are highly likely.