The Government has announced its new housing policy which has removed the tax deductibility for interest costs associated with residential property investment. This new policy will further reduce the commercial benefits of residential property investment along with the extension of the bright-line test from 5 years to 10 years.
Business ownership continues to be exempt from any capital gains tax and all interest costs continue to be 100% tax-deductible. This is a clear message from the Government they are wanting to encourage more of New Zealand’s investment dollars into the business sector and away from the residential property market. The Government has a strong view that business investment is better for the economy and creates more jobs than residential property investments.
One line of thought for property investors caught on the wrong side of this new legislation is to consider business ownership as a tax-efficient asset for any bank debt required for property ownership. New ownership structures for property investments will be encouraged to diversify into business assets so they can still claim all their interest costs for the annual tax return. Experts and accountants have already commented that all new investment structures should move debt out of investment properties and leverage up business assets that continue to offer tax deductibility for interest costs.
We expect this new tax policy to increase interest in business ownership and this will have a positive flow-on effect for the future New Zealand economy.