Have your say over interest expenses on rental properties

Earlier this year, the government announced that interest deductibility will be disallowed on residential investments.  

The rationale behind this is that government does not want the same stock being bought and sold at higher price. It wants existing houses to be left for the homeowners and not for investors.

The tax policy is being used as a deterrent to invest into existing housing stock.

Main focus areas

Housing affordability: The idea is to reduce incentive for non-owner occupier to invest in existing residential properties.

Housing Supply: By allowing interest deductions on new builds, new dwelling will be added to the inventory, thereby increasing supply.

Boosting other Sectors: The government was to focus on other investment areas as opposed to the residential housing. Investments would be channelled to other areas such as commercial dwellings, businesses, and financial markets.

Affected sectors

As a general rule of thumb, the new rules will be applied to interest on debt to purchase or operate residential investment property, which is primarily residential property rented to tenants. Some exclusions would be (1) Land outside New Zealand (2) Employee accommodation (3) Farmland (4) Care facilities, hospitals, nursing homes and similar establishments (5) Commercial accommodation such as hotels and motels (6) Retirement Villages and Rest Homes and (6) The Main Home

Definition of New Build

The government has decided that ‘New Build’ residential properties should be exempted from the proposed new interest limitation rules and subject to a  five-year Bright-Line Test (rather than a ten-year test).

New build is defined as (a) A dwelling is added to vacant land (b) An additional dwelling is added to a property, whether standalone or attached (c) A dwelling (or multiple dwellings) replaces an existing dwelling (d) Renovating existing dwelling to create two or more dwellings.

Key points of the new rule

When a property is sold within bright line period, Revenue Account Rules may apply.

Properties taxed on sale under the Bright-Line Rules are held only under Revenue Account, once it is known that they will be sold within the Bright-Line period. They are not otherwise held under Revenue Account.

The government has agreed in principle that property developers should be provided an exemption from the interest limitation rules.

The development exemption is intended to cover (a) land being developed by persons in the business of developing or dealing land or erecting buildings (captured under section CB 7 of the Income Tax Act 2007), and (b) other developments which may not be covered under section CB 7 but contribute to the creation of a new build. For example, persons undertaking a one-off development or developing properties to rent out themselves (if they are not already in the business of developing or dealing in land or erecting buildings).

Interest Deductibility

Interest deductibility permission will be allowed on debt relating to residential investment property, provided that the debt is used for subdivision, development or erecting a new build, and the activity is carried out for the purpose of creating one or more new builds.

The government is holding public consultation to discuss properties related to remediation work. Consultation closes on July 12, 2021. The measures will be introduced to Parliament later this year but will apply from October 1, 2021.

The discussion document, “Design of the interest limitation rule and additional Bright-Line rules will be available at https://taxpolicy.ird.govt.nz/publications/2021/2021-dd-interest-limitation-and-bright-line-rules and accompanying summary sheets at www.taxpolicy.ird.govt.nz

Saurav Wadhwa is a Chartered Accountant by qualification. He is the Principal Accountant at IBBZ Accounting Limited, Chartered Accountant & Tax Specialist, located in Botany, East Auckland.
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