Budget 2021: More details released
June 21, 2021
Following the 23 March announcements the Government last week released its housing tax discussion document following the 23 March announcements. We have summarised below the main points relating to the discussion document.
Please note, this is a discussion document and is not yet legislation. We will keep you up to date on the discussion and any subsequent legislation.
The 23 March announcement set out that interest deductions on residential investment property acquired on or after 27 March will not be allowed from 1 October 2021. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out.
If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021.
Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.
These rules are known as the interest limitation rules.
Generally, the new interest limitation rules will apply to residential property which is rented to tenants. However, there are a number of proposed exclusions to this:
- Residential property outside New Zealand;
- 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;
- Income-earning use of an owner-occupier’s main home such as a flatting situation.
The discussion document also seeks feedback on possible exclusions for student accommodation, serviced apartments and Māori collectively owned land and housing.
In practice the Government proposes the use of tracing rules where a loan is used for multiple purposes. These will determine whether interest is subject to the new rules or not.
Under the proposed tracing approach:
- Borrowing solely for non-residential rental purposes will be unaffected.
- Interest deductibility will not be impacted if security or collateral for a loan is residential property. Instead the purpose of the borrowing will be the important feature.
Close companies (for example, companies with five or fewer shareholders whose assets are more than 50% residential property) and widely held companies whose assets are more than 50% residential property will not be able to apply the automatic interest deduction. They will instead need to apply the tracing rules. They propose an “interposed entity” rule will apply to residential rental property held through companies, trusts and other entities.
Refinancing a loan entered into prior to 27 March 2021 will not result in loss of interest deductions from 1 October 2021 (instead the phased approach will apply).
Special rules are also proposed to deal with revolving credit facilities and offset loans offered by banks. The discussion document proposes “high watermark” rules to limit interest deductions based on the level of borrowing that was in place as at 27 March 2021.
“New build” defined
The discussion document proposes a “new build” be defined as when:
- a dwelling is added to vacant land;
- an additional dwelling is added to a property, whether stand-alone or attached;
- a dwelling (or multiple dwellings) replaces an existing dwelling;
- renovating an existing dwelling to create two or more dwellings; and
- a dwelling is converted from commercial premises such as an office block converted into apartments.
The discussion document proposes that early owners (eg: those who obtain a new build no later than 12 months after its Code Compliance Certificate (CCC) is issued or add a new build to their land) would be eligible for the new build exemption from the interest limitation rules. It also asks for feedback on whether subsequent purchasers (those who acquire a new build more than 12 months after the new build’s CCC is issued) should also qualify for the exemption. The document is also seeking feedback on whether the exemption should be in perpetuity for early owners or for a fixed period (totaling 10 or 20 years) for both early owners and any subsequent purchasers.
The discussion document covers a range of other technical and transitional issues including:
- A proposed exemption from the interest limitation rules for residential property development, including where a development is by a non-developer (undertaking a subdivision, development or building to create 1 or more new builds). It also considers where remediation work (in relation to uninhabitable buildings) should qualify for the development exemption.
- Whether an interest deduction should be allowed at the time of disposal of a property that will be subject to tax (i.e. under the bright line test or the other land taxing provisions).
- Rollover relief (from both the bright-line test and interest limitation rules) where property is transferred to a trust and for transfers where there is no significant ownership change.
To read the full Discussion Document and summary sheets from the IRD, please click here.
We will keep you up to date with any further announcements.