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New Zealand Explains Recent Tax Law Changes

Thursday, April 15, 2021

The New Zealand Inland Revenue Department has released a new "special report" to provide guidance on changes to real property tax rules and other tax rules that were included in the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021.

The Act contained changes codifying when businesses can deduct expenditure related to completing, creating, or acquiring property (business assets) that is later unsuccessful or abandoned over five years.

Further, the Act extended the bright-line test for residential properties from five to ten years. Under New Zealand law, the bright-line test centers on whether a person sells a residential property (other than a newly built home) within a set period after acquiring it. If the test is satisfied, the taxpayer will be required to pay income tax on any profit made through the property increasing in value.

The extended bright-line test applies if a person has acquired an estate or interest in the land on or after March 27, 2021. The paper includes in-depth guidance on how to determine whether a property sale is caught by the bright-line test.

Further, the special report discusses new purchase price allocation rules in sections GC 20 and GC 21 of the Income Tax Act 2007 (the Act). These are intended to reinforce and extend existing provisions requiring parties to a sale of business assets with different tax treatments to adopt the same allocation of the total purchase price to the various classes of assets for tax purposes.

Other changes discussed in the guidance include an amendment to the Income Tax Act on what expenditure is eligible for the research and development tax credit, in particular to clarify that the expenditure must be closely connected with conducting an research and development activity to be eligible for the research and development tax credit.

Finally, the report discusses new provisions in the Income Tax Act to introduce temporary loss carry-back rules. The rules allow a company with net losses in the 2019–20 or 2020–21 income years to carry losses back to offset taxable income in the immediately preceding income year, in order to receive a tax refund.