Interest deductibility update - June 2021
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Articles by Matthew Gilligan
On 10 June 2021, the Labour Government opened up a five-week consultation period on the new interest deductibility rules.
They have released a Design of the interest limitation rule and additional bright-line rules discussion document which is lengthy and quite detailed, and reveals some interesting thinking, some of which I think is surprisingly taxpayer friendly.
On first look through the document, the following points are worthy of mentioning. Before going on, I stress that these are all proposals subject to feedback and finalisation (i.e. things could yet – and probably will – change).
1. Interest limitations will not apply to property outside of New Zealand.
2. Interest limitations will not apply to the home. For example, if you rent out three bedrooms of your home, interest expenses will be deductible as usual.
3. They are giving consideration as to whether serviced apartments and short-term stay accommodation type properties that are not “suitable substitutes for a home” should also be carved out from the interest limitation rules.
4. There is a fair bit of detail on what they anticipate a new build to be. The underlying philosophy is that the concession is available where there is an increase in housing supply. The following examples are given of newbuilds:
• 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.
• Replacing an existing dwelling with one or more dwellings. Therefore even a one for one replacement is proposed to qualify.
• Adding a second or further dwelling to land that already has a dwelling on it.
• Attaching a new dwelling to an existing dwelling; for example, building on top or developing underneath.
• Splitting an existing dwelling into multiple dwellings. They give an example of a six-bedroom house converted into 2 x 3 bedroom units.
• Converting a commercial building into residential.
5. The exemption means that interest will be deductible from the point of acquisition if you buy one of these properties within 12 months of the Code Compliance Certificate (CCC) being issued or from the point of CCC being issued if you develop it 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. They are considering whether the concession on interest deductions should apply only to the first owner of the building or whether it can pass 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, which is to say if you incur interest costs developing a new build then you can claim those costs as you go through the development process until the point of sale or issue of CCC. If you retain it as a rental once you have CCC, you then qualify for the new build exemption.
9. The government is considering allowing denied interest deductions to be claimed on sale, but I am not optimistic about this. They have set out several options here, but have not tipped their hand as to what they prefer.
The options range from extraordinarily 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. My pick is they won’t land on the taxpayer friendly option, but there might be a middle ground, e.g. allowing deductions to be claimed as long as they don’t exceed the gain.
10. The most surprising inclusion in the discussion document is that they are considering 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 transfer of residential property into a trust without resetting the bright-line clock, for example.
I will update this article as further points come to light - keep an eye on our Tax Changes Resources webpage for the latest information.
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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