Interest Deductibility Limitation and Tax Changes

On the 29th of March Parliament passed the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill. This bill includes measures aimed at limiting the deductibility of interest incurred for residential property investments and updates to the residential property bright-line test.

Interest limitation rule
From 1 October 2021, interest will not be deductible for residential property acquired on or after 27 March 2021.
For properties acquired before 27 March 2021, generally owners’ ability to deduct interest will be phased out between 1 October 2021 and 31 March 2025.
You’ll still be able to deduct interest for some residential properties:
• A portion of the main home if it is used to earn income (eg from flat-mates or boarders)
• Property development and new builds
• Houses on farmland
• Commercial accommodation such as hotels, motels, and hostels (but not short-stay accommodation provided in a residential dwelling)
• Employee accommodation
• Land outside New Zealand

If your property does not fall within the exemption criteria and your property was acquired before 27 March 2021, the following phasing out of deductible interest applies:

Bright-line property rule – New builds
In addition to the government excluding new builds from the interest limitation rule, they have introduced a 5 year bright-line property rule for new builds acquired on or after 27 March 2021. The purpose is to encourage the supply of new housing.
A new build will generally be defined as a self-contained residence that receives a code of compliance certificate (CCC) confirming the residence was added to the land on or after 27 March 2020. It will also include a self-contained residence acquired off the plans that will receive its CCC on or after 27 March 2020, confirming it has been added to the land.
A new build will not have to be made of new material or constructed onsite, so it can include modular and relocated homes.
If you convert an existing dwelling into multiple new dwellings, this can qualify as a new build. So too can converting a commercial building into residential dwellings.

Other points to note regarding the bright-line rules:
• tax is not triggered when the legal ownership of a property changes if the effective ownership is the same, eg property put into a trust, or transferred from a trust back to the original settlor
• transfers from a trust to a beneficiary (who was not the original owner of the property) will trigger bright-line
• parents assisting their children to purchase residential property will trigger bright-line if the parent transfers their share of the property to the child within the bright-line period.

Navigating these property rules can be tricky. If you are considering investing, selling down or transferring ownership of property, you may want to chat with one of our team first to avoid any nasty tax surprises.