March was a busy month on the tax development front, where we finally got the detail of some important property related changes, plus some other bonus changes that were introduced at the last minute before the legislation was passed. Some of these will impact forecast tax payments for the current tax year, others may impact decisions around buying or selling property, and we look at the key changes below.
Removal of commercial building depreciation
As expected, the ability to claim tax depreciation on commercial buildings has been removed with effect from the start of the 2024-2025 tax year. For businesses with a March balance date, this will be from 1 April 2024, but for December balance dates for example it applies from 1 January 2024.
There are some exceptions to the rule for buildings that are expected to have a useful life (in Inland Revenue’s eyes) of less than 50 years – this includes things like coolstores and farm buildings for example.
Fitout of commercial buildings also remains depreciable provided these items are separated out from the building structure cost.
If you have not separately depreciated fitout of commercial buildings acquired since 2020 it will be possible to request that a portion of the total cost be allocated to fitout and amend the relevant tax returns, provided the market value of the fitout can be established.
Interest deductibility for residential investment property restored
Interest payments on mortgages for residential investment property will be phased back in, although not as quickly as the National Party had campaigned on. From 1 April 2024 80% of interest will be deductible, with interest being fully deductible from 1 April 2025 onwards. The exception to this is for new builds where interest remains 100% deductible in all years.
Bright-line test back down to two years
As campaigned for by the National Party, the ten-year bright line test for residential property will be reduced to two years. This will apply from 1 July 2024, meaning that properties bought before 1 July 2022 will not be subject to the bright line rules if a conditional agreement for sale is entered into on or after 1 July this year.
There are also some taxpayer favourable changes to the way the main home exemption operates (to revert back to looking at the predominant use of the property) and the extension of rollover relief for transfers between associated persons.
Changes to the tax treatment of disposals of trading stock at below market value
In response to perceived over-taxation, the rule that treats trading stock disposed of for less than market value to be deemed as having been sold at market value has been removed for donations of trading stock to charities and for other disposals in the course of business (such as for marketing purposes).
The market value rule could still apply though where trading stock is donated to entities that are not charitable (this could include individuals and non-profits that either can’t or haven’t registered as charities), unless there is some benefit to the business that is donating the stock.
Trustee tax rate de minimis threshold
The trust tax rate rose to 39% from 1 April 2024 (or the equivalent start to the 2025 tax year), but a last-minute change to the legislation allows the 33% rate to continue to apply to trusts with trustee income up to and including $10,000 (after deductible expenses).
This lower rate is also extended to certain types of trusts, regardless of income level, such as disabled beneficiary trusts and deceased estates.
If you would like help understanding how these changes affect you, please contact a tax professional.
