SOP commentary released
AWIR’s 4th of October edition mentioned the addition of a SOP to the current tax Bill, the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (65-1), to include the proposed interest deduction limitation rules and amendments to the bright-line rules. The accompanying narrative to the SOP included reference to a detailed commentary document being issued within the next few weeks and this has now occurred.
I promised you all a more detailed article on the proposed changes once the commentary was released and having now skimmed through the 129 page document (ok, it was a little slower than a skim), the following is my summary of the proposed changes as they developed their way into draft legislation:
- We have a few new terms which will no doubt become everyday language soon – “disallowed residential property” (DRP), “interposed residential property holder” (IRP holder), “excepted residential land”, and “transitional residential interest” – no acronym given to the latter two sadly.
- DRP will be defined as land in New Zealand (remembering that the interest deduction limitations do not apply to residential land outside of New Zealand) to the extent (important words!!) it has a place configured as a residence or abode, the owner has an arrangement to erect a residence or abode, or it is bare land that could be used to erect a place configured as a residence or abode.
- A proposed new Schedule 15 will contain the list of excepted residential land, which naturally will be excluded from the DRP definition.
- The rules will apply to most close companies (five or fewer shareholders own >50%) that own DRP as well as non-close companies that are “residential land companies” or “residential land wholly-owned group members” (basically DRP >50% of total assets).
- An exemption (land business exemption) from the rules would apply to interest incurred for land held by property developers, subdividers, dealers and builders for a land-related business described in section CB 7.
- A development exemption will apply to land involved in one-off projects which are likely to be taxed under section CB 12 (minor subdivision rules). The development, building, or subdivision would have to have the purpose of creating new build land, otherwise the exemption will not apply. Interest would be claimable from the commencement of the undertaking or scheme.
- No doubt the key exemption for investors is the “new build land” exemption – let’s call it ‘NBL’ since it has no given acronym and there will be a few bullet points here. ‘NBL’ will be land to the extent (there’s those important words again) to which it has a place configured as a self-contained residence or abode, where a code compliance certificate (CCC) has been issued on or after 27 March 2020, evidencing that the new build has been added to the land. Also land for which there is an agreement that a place configured as a self-contained residence or abode will be added to the land and a CCC will be issued on or after 27 March 2020 evidencing that the place was added to the land, and land where a hotel or motel was converted into self-contained residences or abodes, provided the conversion was completed on or after 27 March 2020 and the conversion is recorded by a local authority or building consent authority.
- ‘NBL’ will naturally include the land exclusively used by the residents of the new build, plus a reasonable proportion of any shared areas.
- ‘NBL’ exemption will apply for 20 years from date of issue of CCC, and all owners of the land within that time period will qualify.
- ‘NBL’ exemption will extend to off-the-plans acquisitions provided taxpayer could deduct the interest under existing deductibility rules.
- Remember there are no proposed changes to the existing residential rental loss ring-fencing rules, so even if you qualify for the ‘NBL’, your interest deductions may still be subject to ring-fencing.
- Transitional residential interest is in relation to the so-called grand parented loans – New Zealand Dollar loans on DRP drawn down prior to 27th March 2021, subject to a phase out period through until 31st March 2025. There are a number of specific calculation rules in relation to tracing issues, use of variable balance loans and roll-over relief provided for certain land transfers during the phase out period etc.
- If a DRP disposal is taxable (say under bright-line), then previously disallowed interest would be deductible in the year of sale. Note however, that if bright-line taxation applies, then to ensure the anti-arbitrage provision is catered for (bright-line losses only offset against taxable land sale gains), the interest will be treated as if it is part of the original cost of the DRP. Where bright-line does not apply, then the amount will retain its interest character however likely then subject to the residential rental loss ring-fencing rules.
- ‘NBL’ qualifies for a five-year bright-line period provided the owner bought the NBL within 12 months of the CCC for the new build being issued, or they acquired the land with an agreement in place to construct a new build, or the owner constructs a new build on the land themselves, and critically, the new build remains on the land when the land is sold.
- Where the land contains both a new build and an old build, then two bright-line periods will apply – five years for the new build and 10 years for the old build.
- The bright-line period does not restart when the new build is added to the land, so if for example, you added a new build to bare land three years post purchasing in August 2021, the bright-line period commencement date remains August 2021 and you could then dispose of the land free of bright-line taxation anytime post August 2026, provided the new build still existed on the land at the time of disposal.
- The main home exclusion rules have changed, but essentially the main home should never be taxed itself (unless used for non-main home purposes for periods in excess of 12 months), however apportionment issues will arise if the main home takes up less than half the land area.
- Roll-over relief will apply for the bright-line rules in relation to certain transfers of residential land that occur during the bright-line period – the transferee will simply step into the shoes of the transferor and be deemed to have the same acquisition date and cost for the land. These rules will have application to transfers occurring post date of the Bill’s enactment.
- Transfers to family trusts where each transferor of the land is also a beneficiary of the trust, at least one of the transferors of the land is also a principal settlor of the trust, and each beneficiary (except for principal settlor beneficiaries) has a family connection with a principal settlor (within four blood degrees), is a company controlled by a family member beneficiary or is a charity. Note that no roll-over relief applies where the transfer is from the family trust to a principal settlor or beneficiary. Also any transfer amount must not exceed the original cost of the land to the transferor.
- Transfers to or from LTC’s and partnership provided that the persons transferring the residential land to the LTC or partnership (or acquiring it from the LTC or partnership) have ownership interests in the LTC or partnership interests in the partnership in proportion to their individual interests in the land, and their cost base relative to the total cost base in the land. Once again the transfer consideration cannot exceed the original cost of the land to the transferor.
Remember that if you would like to make a submission to the FEC to have your say on any of the proposals in the latest tax Bill, you must do so no later than 9th November.
There were a couple of other tax related releases during the past week, but nothing earth shattering and due to this extended article I will leave to cover off next week.
This article from the ‘A Week in Review’ newsletter was originally published Monday 18th October 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me email@example.com.
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