Interest Deductions was featured by Property Ventures (16 June 2021)

In March, the government announced some measures relating to the taxation of residential rental property, in the hope to be seen to be doing more about the runaway housing market. You can read my initial comments in a previous post.

The change that has caused the most conversation since the announcement is the removal of interest deductibility from residential investments acquired on or after 27 March 2021, unless they’re “new build” properties, and what that even meant, in absence of any clear definition.

Yesterday, 10 June 2021, the government commenced the consultation process which will run until 12 July. Links below, including the 143 page document that I read so you don’t have to. It is incredibly important to note that these are not final law and should not be taken as such, some change from the current position is likely. Though cynics will point out that other “consultation” on law changes relating to property in the last few years has been mostly ignored with laws passed largely unaltered.

In any case, the discussion document provides further detail around the IRD’s current view of the application of the proposed law. A number of items that surprised me a little, and many that were entirely as expected.

Surprising (and Positive) Interest Deductions News

• Relating to Bright Line, not Interest Deductibility, but announced at the same time – proposed rollover relief so change of legal but not underlying ownership (ie, transfer to LTC or Trust) may not trigger Bright Line anymore from 1 April 2022

• Considering the option of allowing some interest deductions on sale even when the capital gain is tax-free

• New Build exemption likely to include situations where one existing dwelling is split into multiple self contained dwellings

• New Build exemption will either be in perpetuity, or for a lengthy period of time (10 and 20 years mentioned)

• New Build exemption (for a fixed period) may be available to subsequent purchasers of new build property

• A “stacking” option is likely to exist for allocating preexisting loans between residential and non-residential uses, based on market values – this allows for full deductibility on commercial and business loans without requiring a restructure.

• Creation of a “High Water Mark” reducing the potential cancerous effects of revolving credit loans.

Surprising (and Negative) Interest Deductions News

• No proposed exemption for existing new builds prior to 27 March 2021. If a property received its CCC in February 2021 and was acquired on 15 March 2021, no new build exemption

• But if this were sold to another party within 12 months from CCC, that party would get the new build exemption. This is a grotesque outcome

• Possibility that a property will not be a “new build” for interest deductibility if it has ever been owner occupied

Pretty Much As Expected

• Exemption for refinancing loans – this is not treated as “new debt”, as long as both loans are in $NZD

• Exemption for flatmate/boarder income in your main home.

• Short term accommodation (AirBnB etc) is expected to be included in the limitation

• Converting your home into a rental property still allows for the 4-year phase out of interest

• Developing property to hold will get the developers exemption during development

• Developing property to hold will get the new build exemption after CCC is issued

• New Build exemption likely to include situations where existing commercial is converted into residential

• Considering the option of allowing interest deductions on sale when the capital gain is taxable

• New build exemption likely to include shifting an older existing home onto a section

• Interest limitation even overrides the “general rule” for companes which allows interest deductions

Still Want More?

if you’re after further reading, there are some surprisingly reader-friendly Summary Sheets on these changes, linked below, as well as the full discussion document:

Changes to Deductibility – Overall Summary
Who is affected?
What types of properties are affected?
“New Builds” Exemption
Development Exemption
Deduction when Property Sold
Changes to Bright Line
Full Discussion Document (warning – 143 pages)
And also the original 23 March IRD Fact Sheets on Interest Deductions and Bright Line Changes

Next Steps

I will be submitting a summary of my views to IRD, and encourage anyone reading this to do so also before the deadline of 12 July 2021. These changes are happening, but we can still do our best to get the fairest possible version of them.

Email me if you would like a copy of my submission to inspire your own – but no copy-pasting, likely to reduce its impact.

Submissions are invited on the options and proposals in the discussion document. Your submission should include a brief summary of your main points and recommendations. Please also indicate whether  officials from Inland Revenue may contact you to discuss the points raised, if required.

Submissions can be made by email to [email protected] with “Design of the interest limitation rule and additional bright-line rules” in the subject line