On 10 June, the Government released a 143-page discussion document providing further insight on how it will be limiting the deductibility of interest on residential investment property. The Government confirmed that interest deductions will generally no longer be available on residential investment properties, with properties purchased before 27 March 2021 being subject to a four-year phasing out period between 1 October 2021 and 31 March 2025.
In general, the proposals will apply to interest on debt used to purchase or operate residential property, which is primarily residential property rented to tenants. There are a number of proposed exclusions;
- land 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, and
- main home — the interest limitation proposed would not apply to interest related to any income-earning use of a owner-occupier’s main home such as a flatting situation.
There are also proposals around excluding ‘New Builds’ from the rules. As well as being exempt from the proposed changes, ‘New Builds’ will also only be subject to a five-year bright line test. Generally, a residential property would be considered a ‘New Build’ if it is a self-contained dwelling with its own bathroom and kitchen and that has received a code compliance certificate.
Properties may be considered a ‘New Build’ when the dwelling;
- Replaces existing housing
- Is converted from commercial premises
- Is added to vacant land or is added to existing property
- Is renovated to create two or more dwellings
The Government is also considering whether subsequent owners and owners who acquire the property within 12 months after the buildings code of compliance is issued should also be exempt from the interest changes and for how long any exemption might last.
The actual legislation is due out later this year with effect from 1 October 2021.
Please contact us should you wish to discuss any of the above in more detail.