What is a ‘New Build’ under interest deductibility rules and extension of the bright-line test?

In March 2021 the government announced its intention to limit the deductibility of interest on the residential investment property.
This month a detailed document has been released by the government to the decisions they made regarding those tax changes.

The highlight of both these tax changes are:

• Preventing residential property investors from writing off interest as an expense when paying tax, and

• Extend the bright-line period to 10 years for residential property except newly built houses (new builds).

The Government has decided that “new- build” residential properties should be exempted from the proposed new interest limitation rules and subject to a five-year bright-line test (rather than a ten-year test).

In the document, a property is considered ‘New Build’ 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.

• a dwelling converted from commercial premises such as an office block converted into apartments.

• a dwelling should have its own kitchen and bathroom and must have been acquired within 1 year of receiving a code compliance certificate.

The government is looking for feedback on how long a property can be considered a new build - 10 or 20 years and if the new build period will only apply to early owners or subsequent owners as well.

In addition to owner-occupier property, the types of properties which will be exempted from the interest deductibility rule change are the following:

• Land outside New Zealand

• Employee accommodation

• Farmland

• 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

• Property owned by Kāinga Ora and its subsidiaries

• Main home - the interest limitation proposal would not apply to interest related to any income-earning use of an owner-occupier’s main home such as a flatting situation.

• Certain student accommodation, serviced apartments, and Māori land are also considered.

In addition to that, the proposals will also affect entities like companies differently from individuals. Companies are generally allowed deductions for interest without needing to trace the use of their borrowed funds. The interest limitation rules will override this general rule for close companies and companies whose assets are primarily (more than 50%) residential investment property so that taxpayers cannot avoid the interest limitation proposal by using companies to borrow to acquire a residential investment property.

Another complex issue the Government is seeking feedback on is 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. And the document considers how the interest deductibility rule change would work with the rental loss ring-fencing rule.

The tax rule changes are already operative, despite their details still being designed.

Members of the public have until July 12 to make submissions on the document.

The extension of the bight-line test applies to residential land bought on or after March 27, 2021. Read the blog in detail here

Interest on debt acquired on or after March 27, 2021, won’t be able to be written off as an expense from October 1, 2021.
The rule will be phased in over four years for interest on debt acquired before March 27, 2021. Read the blog in detail here

Click here to read the detailed Design of the interest limitation rule and additional bright-line rules.

Source: Interest.co.nz and Design of the interest limitation rule and additional bright-line rules.