Eyes on Tax: Interest deductibility, the trust tax rate, and what they mean for you

With the financial year-end approaching quickly and taxpayers looking for certainty, there has been movement on some of the outstanding tax items we have been expecting: 

Interest deductibility for landlords 

After much anticipation, the Government has agreed to restore deductibility for mortgage interest on residential investment properties. This reverses the previous Government’s decision in 2021 to remove interest deductibility, with the exception of new builds and those loans subject to phasing-out rules. 

This move was designed to reduce investor demand for existing homes, increase supply, and ultimately improve housing affordability.  

The Coalition Agreement between the National Party and the ACT Party, formed after the 2023 General Election, stated interest deductibility would be restored with a 60% deduction in the 2023/24 financial year, an 80% deduction in 2024/25, and 100% in 2025/26.   

However, Associate Finance Minister David Seymour announced different phasing-in timeframes on March 10.   

Landlords will be able to claim 80% of interest expenses from April 1, 2024, and 100% from April 1, 2025. We assume this will apply for tax years starting on or after 1 April 2024 and 1 April 2025, and that this will not impact those landlords able to claim interest expenses under existing rules, but we await formal draft legislation to confirm. 

Trust tax rate 

With the support of statistics, the original intention to increase the Trust tax rate to 39% and align with the top personal tax rate has come under heavy scrutiny. For example, a progressive or tiered trust tax rate was mooted, noting that in the 2021/22 tax year only 11% of trusts had taxable income in excess of $180,000. 

The Finance and Expenditure Committee, reporting back on the Bill containing the increase to the Trust tax rate, has broadly agreed that a de minimis threshold should apply to trusts. 

Again with the support of statistics it has now been determined that a $10,000 de minimis threshold is appropriate. That is: 

  • trusts with trustee income of $10,000 or less would continue to be taxed at the lower rate of 33%; and 

  • trusts with trustee income of $10,001 or more would be taxed at the higher rate of 39%. 

It is applied on an “all or nothing” basis, i.e. trusts exceeding the threshold will be taxed on all trustee income at 39% (it is not progressively applied).  

Everything is pointing to the legislation applying from the start of the 2024/25 income year.  

Still to come 

While we are pleased to have more clarity around interest deductibility and the trustee tax rate, the Government has yet to provide an update on depreciation on commercial buildings (previously signalled to be reduced to 0%) and changes to the bright-line timeframes (proposed to be a two-year test from 1 July 2024, effectively to be applied retrospectively). 

Our thoughts

We welcome the certainty both updates provide to taxpayers. 

Phasing back in interest expenses is a move towards simplicity and ultimately removes the need to have a detailed (and complicated) definition of a new build. 

While the trust tax rate is broadly as expected, with a lower threshold, this approach has been calculated to prevent the over-taxation of some 45% of trusts and remove the urge for some taxpayers to set up multiple trust structures to sidestep a higher rate. This seems like a sensible compromise to us. 

We look forward to the certainty that an update on the remaining two items would provide. With respect to the proposed changes to bright-line, a 1 July 2024 timeframe will certainly change taxpayer behaviour and the removal of depreciation on buildings will do the same (separating commercial fit-out will be become of greater importance again).     

For more information about tax in New Zealand, read more of our Tax Insights or reach out to your local BDO adviser.