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The New Zealand government has announced a number of changes to tax rules, including extending the bright line test to 10 years and disallowing interest deductions on residential investment property, which are part of a wider package intended to help address housing affordability. Ministers have described the proposed changes as removing tax “loopholes” benefiting property investors that are currently allowing them to outbid first home buyers and current homeowners looking to move into a new home.

In our view, the changes are blunt tools with potential unintended consequences when considered in the context of the established principles of tax policy design. Specifically, these changes when coupled with the new personal marginal tax rate of 39% further
erodes the coherence of New Zealand’s tax system and introduces additional complexity without a clear view of the long term effects of such changes on the tax system.