Public Discussion on Interest Deductibility Rules

Earlier this year the Govt. announced interest deductibility shall be disallowed on residential investments.  The rationale behind this is, the Govt. do not want same stock is being bought and sold at higher price. They want existing houses should be left for the homeowners Not for investors. The tax policy is being used as a deterrent to invest into existing housing stock.

Govt Key focus

• 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. More supply.
• Boost other sectors- focusing 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.

Who will be subject to new rules:

In general rule of thumb, the new rules are applied to interest on debt to purchase or operate residential investment property, which is primarily residential property rented to tenants.

Exclusions:

1. Land outside New Zealand
2. Employee accommodation.
3. Farmland
4. Care facilities, hospital, nursing homes etc
5. Commercial accommodation: hotel, motels etc
6. Retirement villages and rest homes
7. 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 dwelling is added to vacant land
• An additional dwelling is added to a property, whether standalone or attached
• A dwelling(or multiple dwellings) replaces an existing dwelling.
• Renovating existing dwelling to create two or more dwellings.

Key points of 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 on revenue account only once it is known that they will be sold within the bright-line period. They are not held on revenue account otherwise.
• 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:
  • 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
  • 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 permission shall be allowed on debt relating to residential investment property, 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 discussion is being done to discuss properties related to remediation work.

Consultation closes on 12 July 2021. The measures will be introduced into Parliament later this year but will apply from 1 October 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 taxpolicy.ird.govt.nz.

Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.

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