Limitation of Interest Deductibility on Residential Property Investment Released
September 30, 2021
Earlier this week the Government released draft legislation outlining some detail in relation to the March interest limitation proposals.
The proposals are contained in Supplementary Order Paper No. 64. It is pretty dry and the devil is in the detail so please bear with us.
We have attempted concisely to summarise the key points below:
As an overarching principle, residential investment properties capable of being used for long term accommodation would be subject to the proposed rules. However, the following exclusions and exemptions are proposed:
- an exclusion for the main family home
- exclusions for several types of residential property, and
- exemptions for new builds and for property development.
Property acquired on or before 27 March 2021 will be subject to a phasing out of interest deductibility over the period 1 October 2021 and 31 March 2025.
The below table shows the proposed phasing for this:
Land outside New Zealand would be excluded from the new rule.
As mentioned above exemptions are proposed for property developers and for owners of new builds.
A new build for these purposes are proposed to be:
- a dwelling added to vacant land
- an additional dwelling added to a property, whether stand-alone or attached
- a dwelling (or multiple dwellings) replacing an existing dwelling
- a dwelling created by renovating an existing one to create 2 or more. For example, turning a 6- bedroom dwelling into 2 3-bedroom dwellings (both with their own bathrooms and kitchens)
- a dwelling converted from commercial premises. For example, an office block converted into apartments.
They also deem a new build to be a property that received its code compliance certificate (CCC) on or after 27 March 2020 will be classed as a new build under this legislation. These properties will be eligible to deduct interest for up to 20 years from the time the property’s CCC is issued. The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20 year period.
In addition, the initial purchaser or early owners of new builds would be subject to a five year bright-line test, rather than the ten year test.
Where does the Bright-line test apply when transferring land between existing owners?
“Disposal” refers to:
- complete alienation of the land by the disposer,
- one person losing ownership of the land and another gaining it, or gaining a corresponding interest in respect of the same underlying land,
and does not include:
- transfers to self in the same capacity, and
- extinguishment of an estate or interest in land to the extent not resulting in some other person acquiring an interest corresponding (in whole or in part) to the extinguished interest.
If “disposal” is for less than the market value, the person disposing the land may be deemed to have derived an amount equal to the market value of the land. Therefore, a land sale is taxable at market value even if the actual amount derived may be lesser.
The Government intends these changes to apply regardless of the type of entity taking on the loan. However, for companies with many different types of assets and sources of funds, allocating interest cost to individual properties will be difficult and costly. To target the changes appropriately they are proposed to apply to the following taxpayers using
loans to acquire residential property:
- Partnerships and limited partnerships
- Close companies (where 5 or fewer people own more than 50% of the company), including look‑through companies
- Any company where residential property makes up more than 50% of its assets. The Government is seeking feedback on how to define these companies, including how new builds are treated in this calculation ‑ see paragraphs 3.1 to 3.16 of the Discussion Document Click here for Discussion Document
- Individuals (everyone else buying a property).
These rules are complex. Submissions on the Supplementary Order Paper and the Bill will likely be heard by the Finance and Expenditure Select Committee in the coming weeks.
Fringe Benefit Tax:
The Supplementary Order Paper also contains a new option for calculating FBT on fringe benefits provided to employees during the 2021–2022 tax year and in future years.
Under the proposed new option, employers would pay FBT at the rate of 49.25% for all employees with all-inclusive pay under $129,681. FBT would then be payable at the rate of 63.93% for employees with all-inclusive pay of $129,681 or more. Generally only to those employees earning over $180,000 in (pre-tax) salary or wages or close to that threshold, assuming they do not receive significant fringe benefits.
If you do have any questions about how the proposed changes effect you please do get in touch. We’re here to help.