On 10 June 2021, the Labour Government released a discussion document to seek public consultation over the next five-week regarding the new interest limitation and changes to the bright-line test rules. You can view a summary of the proposed changes here.
Finance Minister Grant Robertson said the government’s goal for this proposal was to encourage more sustainable house prices by dampening investor demand for existing housing stock to improve affordability for first home buyers.
The discussion document, Design of the interest limitation rule and additional bright-line rules, is quite lengthy and detailed. It reveals some interesting pointers, so we are sharing some highlights in this article. Please note these are merely proposals, so they may be subject to changes after public feedback and finalisation.
1.What property should be subject to the interest limitation rules?
The new interest limitation rule targets New Zealand (NZ) residential property investment, so the exclusions are quite wide. Essentially, where property is not negatively impacting an owner-occupier’s ability to acquire a house in NZ, the property may be excluded from the rules. Please find below a list of examples.
- Land outside NZ
- Employee accommodation
- Care facilities such as hospitals, convalescent homes, nursing homes, and hospices
- Commercial accommodation such as hotels, motels, and boarding houses
- Retirement villages and rest homes
- Main home – the interest limitation proposal would not apply to interest related to any income-earning use of an owner-occupier’s main home, such as a flatting situation.
- Potentially a student accommodation, a serviced apartment and Maori land.
2. Who are subject to the rules?
- All taxpayer types (i.e. individuals, companies, trust and partnerships)
- For companies, only “close companies” and “residential investment property rich” (i.e. more than 50% of assets (by value) are residential property) companies will be subject to the rules.
3. If a taxpayer has a mixture of property types, taxpayers need to trace their funding arrangements to each purpose and allocate interest appropriately. Note if a loan was taken out, secured against the residential investment property, to run a business or for other non-residential business purposes, interest can still be deductible.
4. Some other exemptions are proposed, including property development and related activities & new builds.
5. There are some details on what is anticipated to be a new build. The government’s view is that tax concession is available where there is an increase in housing supply, so the definition is quite broad. Please find below some examples.
- Adding a dwelling to land where there is no existing dwelling. Note that this does not have to be a new build constructed on-site; it includes relocatable houses.
- Adding a second or further dwelling added to a property, whether stand-alone or attached.
- Replacing an existing dwelling with one or more dwellings. Therefore, even a one for one replacement is proposed to qualify.
- Splitting an existing dwelling into multiple dwellings. An example was given of a six-bedroom house converted into 2 x 3 bedroom units.
- Converting a commercial building into residential property.
The exemption means interest will be deductible from the point of acquisition, if one of these properties are purchased within 12 months of the Code Compliance Certificate (CCC) being issued or from the point of CCC being issued if developed by yourself.
6. The concession will only apply to new builds where CCC is issued on or after 27 March 2021. There is a limited exception to this rule for a new build where CCC was issued before 27 March, but the property is sold to a new owner within 12 months of the issue of that CCC.
7. The government is considering whether the concession on interest deductions should apply only to the first owner of the building or whether it can be passed on to subsequent owners. They are also considering whether there should be a time limit on the ability to claim interest deductions on new builds.
8. Additionally, there is a concession for developers, so if a developer incurs interest costs when developing a new build, then he/she can claim those costs throughout the development process until the point of sale or issue of CCC. If the properties are retained as a rental once CCC is issued, they will qualify for the new build exemption.
9. The government is considering allowing denied interest deductions to be claimed on sale. The options range from taxpayer-friendly, which would include claiming interest deductions not only if they exceed any taxable gain but also claiming them when a property is sold for a capital gain, through to taxpayer unfriendly options where there is no offset against future gains even if they are taxable.
10. Another taxpayer-friendly proposal is the introduction of a rollover relief both in respect of bright-line rule and interest deductibility on transferring properties into a trust or transferring rentals into an LTC where the owner(s) hold the shares in the LTC. If this were to come in, it could allow the transfer of residential property into an LTC without resetting the bright-line clock, as an example.
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