Tax Counsel Office work programme | CPA files its submissions on design of interest limitation rules

By July 19, 2021 No Comments
CPA files its submissions on design of interest limitation rules

Tax Counsel Office work programme

Just in case you like to keep up-to-date of what’s on the Revenue’s agenda in terms of tax policy development (predominantly interpretation statements in the making), the July 2021 Public Guidance Work Programme 2020-21 update is now available here.

Some of the items currently in progress which I am certainly interested in seeing, the Revenue’s views include:

  • Income tax – depreciation – identifying items of depreciable property – this item will set out the principles to apply to identify an item of depreciable property,
  • Income tax – depreciation – update IS 10/02 on meaning of building – this item will review IS 10/02 ‘Meaning of ‘building’ in the depreciation provisions’ following the reintroduction of depreciation on some buildings,
  • Income tax – tax credits – segmentation of foreign sourced income – this item will explain how subpart LJ works in terms of identifying a segment of foreign sourced income,
  • Income tax – short-stay accommodation where property owned by a company – this item will explain the tax consequences of making a property available for short-stay accommodation where it is owned by a company; and,
  • Income tax – trusts – New Zealand-Australia DTA – further to submissions received on the issues paper on this topic, this item will see the drafting of an interpretation statement providing guidance for New Zealand trusts on the application of DTAs and the resulting implications in terms of FTCs, determination of residency, and permanent establishment issues.

CPA files its submissions on design of interest limitation rules

For those CPA members who didn’t see last week’s media releases, and with my present involvement within the tax committee, I thought I would draw your attention to five of the submissions we made to the Government:

Firstly, we made it very clear that we did not support the Government’s proposals, that interest deductions in relation to residential rental properties were not a so-called ‘loophole’ as the PR spin doctors had tried to portray to the community at large, and that progressing the changes would not achieve the Governments desired outcomes. Tinkering with the tax system to fix the housing market issues we are all well aware of, is not the right answer (in my personal uneducated view since I’m not an economist) – the core issue is one of supply – basic 101 law of economics, where demand outstrips supply, upward pressure on prices remain. The focus instead therefore should be on the supply side of the equation – increasing the supply of greenfield land and improvements to the planning process.

Now if we look at the tax tinkering in recent times, we had the bright-line two year test introduced in October 2015 (houses prices kept going up), an extension to the bright-line period to five years from 29th March 2018 (houses prices kept going up), residential rental excess deduction carry-forward rules introduced from 1st April 2019 (houses prices kept going up)…and then if we consider foreign taxing jurisdictions like our Aussie cousins who already have a capital gains tax (CGT) – they still have the same heated property market issues as we do – because people continue to desire to live in locations where there is insufficient supply to cater for the demand.

Secondly, if we accept that the proposals will be affected regardless of the tax communities’ submissions, then what can we do to at least ensure interest deductibility is maintained in the greatest number of cases? Well, at least don’t retrospectively penalise those taxpayers who are already locked into the property market. Rather than phasing out their interest deductions over the next 4 years, grandfather their full entitlements. Over time these taxpayers will either pay down their debt (so their interest claims reduce in any event), or they’ll sell the investment property. In this latter respect, at least at this point they will be able to make an informed decision as to whether they will acquire a ‘new build’ and retain interest deductions, or go for the ‘old build’, but with a full appreciation that the interest on any borrowings will no longer be deductible.

Thirdly, that the ‘new build’ exemption should apply to both early owners and subsequent purchasers, as should the retention of a five-year bright-line period.

Fourthly, that at the point it was certain that the land was now held on revenue account (taxable disposal), interest deduction entitlement should commence.

Finally, that to achieve the proposed roll-over relief for the bright-line rules, simply amend the existing section CB 15(2) to extend its application to section CB 6A.

This article from the ‘A Week in Review’ newsletter was originally published Monday 19th July 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me richard@gilshep.co.nz.

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