A Note from Our Accountant – June 2021

Menique Stuart

On June 10th 2021, The Government released the Public Consultation Document about the design of the interest limitation rule and additional bright-line rules which were proposed in March 2021. The public has until July 12th 2021 to make submissions. The measures will be introduced into Parliament later this year but will apply from 1 October 2021.

On the release of the document, National reiterated that they would reverse both the bright-line test extension and removal of interest deductibility. 

The consultation document proposes:

  • Deductions for interest expenses on residential properties will be restricted from 1 October 2021.
  • Grandparented interest (interest on a mortgage on a residential investment property acquired before 27 March 2021) will be gradually phased out between 1 October 2021 and 31 March 2025. Non-grandparented interest would immediately cease to be deductible from 1 October 2021.
  • Property development and new builds would be exempt from the interest limitation rules. 
  • In addition, new builds would be subject to a five-year bright-line test, rather than the ten-year test. The definition of a new build property is considered in the discussion document.
  • Non-residential properties (for example commercial or industrial properties) would not be subject to the new rules. Also excluded would be employee accommodation, farmland; care facilities such as hospitals, convalescent homes, nursing homes, and hospices.

 

Some important points from the consultation document:

– Definition of a new build

The government is proposing the following criteria to define a new build: 

  • A “dwelling” should have its own kitchen and bathroom.
  • 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.
  • A dwelling is converted from commercial premises such as an office block converted into apartments.

As for the question of how ‘new’ a property needs to be, to be considered a “new build” under the interest deductibility rule change, the Government proposed it should have been acquired within a year of its Code Compliance Certificate being issued.

 – Exemptions to the interest deductibility rules

The Government also suggested that in addition to owner-occupier property, the following types of property should be exempt from the interest deductibility rule change: 

  • Employee Accommodation.
  • Farmland.
  • Care facilities like nursing homes.
  • Commercial accommodation like motels.
  • Land outside of New Zealand.
  • Retirement villages and rest homes.
  • Property owned by Kāinga Ora and its subsidiaries.
  • Owner-occupied property with flatmates.

 

 – Interest Deductibility on the sale of a property 

The Government is also seeking feedback on whether an investor should be able to deduct interest as an expense when they come to sell a property and pay tax under the bright-line test.

For more information please see:

Feedback on the discussion document can be sent to Policy.Webmaster@ird.govt.nz with “Design of the interest limitation rule and additional bright-line rules” in the subject line. Feedback must be received by 12 July.

NZ Property Investor’s Federation Guidance on providing feedback. 

 NZPIF is encouraging property investors to provide feedback on the removal of mortgage interest as a deductible expense and the extension of the bright line.  Attached is their guidance document on how to make a submission. 

https://www.nzpif.org.nz/items/view/61271/