For those of you that haven’t yet got around to reading the Government’s 143-page epic on the design of the interest limitation rule and additional bright-line rules, IR has now released a 21-page Q&A to assist with your understanding of the earlier document.
Inside, you’ll find the answer to 73 questions – I’ve picked out a few from the first half that I thought might interest you:
Q1. Why are deductions allowed in situations where a tenant or boarder is within the main home, but not when they’re in a separate dwelling on the same title?
A1. The interest limitation rules are intended to capture property that can be easily substituted for owner-occupied property. Unlike rental accommodation within the main home, accommodation provided in an identifiably separate dwelling on the same title could be easily converted into an owner-occupied property. Including this kind of property in the interest limitation rules, is intended to prevent conversion issues. (Logical? Likely to happen in practice? I’m struggling!)
Q15. Why is an exemption being considered for property taxed on sale?
A15. It’s a question of fairness. One of the intentions behind the denial of interest deductions for residential investment property is to reduce a current tax advantage for property investors due to all interest being deductible while gains on sale are often not taxable. But where the property is taxed on disposal, not allowing deductions would represent over taxation of income. Consequently, it may be appropriate to allow a degree of interest deductibility. (It’s a long time since I’ve heard the word fairness being used in a sentence about tax law by IR – remember their old motto? – “it’s our job to be fair”)
Q17. Why is there an exemption for property development?
A17. One of the Government’s objectives in limiting interest deductibility is to improve the affordability of New Zealand’s housing stock. Lowering demand is one aspect of this, however, ensuring ongoing supply is equally important. This means that, in designing the proposed interest limitation, consideration was given to ensuring that none of the proposed changes would discourage activity that increased housing supply. The inclusion of a development exemption is one of the main ways this will be achieved.
(What about ensuring ongoing supply of rental stock? Keep making it harder for investors and fewer will invest, rental stocks will decline, rent will go up (basic supply vs demand pressures and first-home buyers will struggle even more to save their deposit while renting!)
Q20. What happens if I buy land without the intent to develop it but later do?
A20. While there is no intention of developing the land then the development exemption does not apply. However, a development exemption could apply if the use changes and the land is developed. Submissions are invited on when the interest should become deductible, for example, from when the development activity begins, and how this is determined. (Sensible, but let’s see how this works in practice.)
Q23. Why exempt new builds? – is it fair to favour one class of investors over others?
A23.The Government wants to encourage the supply of new housing. The extended bright-line test and interest limitation rule, if applied to new build investment property, could disrupt the supply of new homes by reducing the demand. The new build exemption is intended to encourage investment in new build properties instead of existing properties. This will be helpful in freeing up existing property for first home buyers to purchase. (So, first home buyers are left with all the old stock? Does the Government really think this old stock is suddenly going to become more affordable? I thought claiming interest deductions was a loophole that needed to be closed?)
Q28. If I buy a new build that received its code compliance certificate (CCC) before 27th March 2021, am I eligible for the new build exemption?
A28. It depends on when you buy the new build. If you bought the new build before 27th March 2021, then it is proposed that you wouldn’t be eligible for the new build exemption. On the other hand, if you buy the new build on or after 27th March 2021 and within 12 months of the new build receiving its CCC, then it is proposed that you would be eligible for the exemption. However, a subsequent purchaser (who acquires the new build more than 12 months after its code compliance certificate is issued) would not qualify for the new build exemption. (Logical? Why not just have any new build bought with a CCC issued post 28th March 2020 qualify, regardless of whether the person bought the land pre or post 27th March 2021 – so you are going to have someone who entered their agreement to buy the new build on 20th March 2021 subject to phase-out versus someone who buys the identical property on 27th March 2021 retaining full deduction!)
Q31. If I live in my property, will I no longer get the new build exemption?
A31. You cannot get interest deductions where there is no income earning activity (for example, if you are living in a residential property without any flatmates, or you are using it as your 13-holiday home). We are consulting on whether private use of a new build would preclude the owner and any subsequent owners from claiming the new build exemption at a later date (for example, if the property is rented out again in the future). It is proposed that your use of the property would not affect whether you can access the five-year new build bright-line test, but the main home exclusion could apply if you are living in the property. (Watch this space – the so-called ‘continued investment rules’ will bring unnecessary complexities and confusion for subsequent purchasers in my humble view).
This article from the ‘A Week in Review’ newsletter was originally published Monday 2nd August 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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