Newsletter July 2022
INTEREST RATES effective 01 JULY 2022
- The UOMI IRD charges has increased to 7.28%.
- Interest rate that IRD pays remains at NIL.
- FBT interest rate for employment related loans is 4.78%.
KILOMETRE RATE 2022 YEAR
- Tier 1 rate $0.83 p/km for all vehicle types.
- Tier 2 rate $0.31 p/km for petrol & diesel vehicles.
- $0.18 p/km for petrol and hybrid vehicles.
- $ 0.10 p/km for electric vehicles.
VARIATION TO TAX POOLING TRANSFERS COV22/15
Amendment has been made to clarify that the last date upon which a taxpayer can make a transfer request is 30 Sept 2022. See TIB Vol 34, No 4, May 22.
DEEMED RATE OF RETURN
For the 21/22 year has been set at 6.01% for purposes of EX 55(4)(b) and (6)(c). (FIF rules)
INTEREST LIMITATION ON RESIDENTIAL LAND & BRIGHTLINE TEST
Before the introduction of the interest limitation rules the largest proportion of deductions for residential property investors was the interest component. However, the Government has decided that residential property investors have an advantage over other occupiers because they can deduct their interest. This conveniently overlooks the fact that the deductions are being made against rental income. However, not content to ring fence residential rental losses they now want to tax investors on income they have not derived by phasing out interest deductions on all residential property apart from new builds. It should be noted that the National Party are promising to reverse this non-deductibility rule.
Whilst every investor’s circumstances are different, not all investors will be impacted the same way by these rules. In fact, some, depending on their investment appetite may make these rules work to their own advantage.
NEW BUILT PROPERTIES (NEW BUILDS)
New Builds qualify for a 20-year exemption from the interest limitation rules and are only subject to a 5-year Brightline Period. The good news is that the exemption is attached to the property itself as opposed to the owner. Consequently, initial and subsequent owners of a New Build will continue to enjoy the 20-year exemption from the interest limitation.
What is a New Build?
A new Build is a property that had a Code of Compliance Certificate (CCC) issued on or after 27 March 2020 and acquired within 12 months of receiving a CCC. Consequently, an existing property can also come within the New Build definition in certain circumstances, for example:
- NEW DWELLING OR CONVERSION OF AN EXISTING DWELLING. If you relocate a dwelling or construct a dwelling on existing land, and CCC is issued on or after 27 March 2020, this will be a New Build for which the interest limitation will not apply. This would also include a conversion of an existing sleepout which does not have a bathroom & kitchen to a self- contained unit with a bathroom and kitchen. In order to satisfy the New Build criteria, the requirement is that the property must be self-contained. Adding a bathroom and a kitchenette would satisfy this requirement.
- RELOCATION OF EXISTING DWELLING ON THE SAME BLOCK OF LAND. Relocating a self-contained unit from one part of the land to another part of the same land. In order for this to qualify as New Build there has to be a valid reason for the relocation, for example the relocation was required in order to create space to erect another dwelling or a minor dwelling on the land.
- MULTI TENANCY CONVERSIONS. A conversion of one dwelling into two residences will give rise to both dwellings qualifying as a New Build as a new CCC will be issued for both.
- REMEDIAL WORKS EXISTING RESIDENCE. A land with an existing residence will qualify as a new build where a significant amount of remedial works have been undertaken:
- Building requires earthquake strengthening and was listed on Earthquake Prone Register, or
- Where there are weather tightness issues that resulted in at least 75% reclad.
INTEREST LIMITATION RULES ALSO DO NOT APPLY TO
SOCIAL HOUSING
Some may view this as an incentive to rent properties as social housing, especially where the agreement in place provides for full remediation of damages caused by the tenants.
Another benefit of this option is the fact that the property investor will not need to fund the period between tenancies or deal with tenants not paying rent. For property to qualify as “Social Housing type Property” they need to be rented to Registered Community Housing Provider, State Housing through Kainga Ora or other government departments.
INTEREST LIMITATION & BOARDING HOUSES
The Interest limitation will apply to a boarding house unless it qualifies as a boarding establishment for the purposes of Excepted Residential Land. It is important to note that a boarding establishment is different to a boarding house. A Boarding Establishment is defined as premises that:
- Are used for the business of supplying accommodation
- Are managed by the business
- Consist of at least 10 boarding rooms that are not self-contained, and
- Include shared living facilities
All of the above need to be satisfied in order for the property to be considered a boarding establishment. The term premises refers to a single site location.
As an example, if there are 4 houses on different pieces of land, even if adjacent, and each has 4 rooms, the properties will not qualify as a boarding establishment. If all 4 houses were on the same parcel of land, then the single site location will be satisfied.
A taxpayer may operate several establishments at different locations. Each location must satisfy the “Boarding Establishment criteria” i.e. to have at least 10 boarding rooms, before the new interest limitation rules will not apply.
The difference between a boarding house and boarding establishment is that a boarding house can easily be converted to an owner-occupied property or a long-term residential rental. The purpose of the new interest limitation rules is to limit interest deduction on these types of properties.
ROLL OVER RELIEF – NEW BRIGHTLINE TEST
An extension to the Rollover relief under the brightline test has been made to provide relief to certain transfers of land to or from family trusts, look through companies, partnerships and within wholly owned, consolidated groups of companies, certain transfers of Maori Land and settlements under the Treaty of Waitangi. Additional amendments ensure that certain transfers that effect co-ownership do not reset the start of the brightline period in certain cases.
One thing to be mindful of is that full rollover relief is only provided when a disposal of residential land is made at the transferor’s acquisition cost or less. Partial rollover relief is available where the disposal is made for more than the transferor’s cost of the land.
FAMILY TRUSTS
Rollover relief applies to transfers of residential land to a Family Trust. Rollover relief is available for a transfer from a Family Trust only insofar as the land is transferred back to the original settlor. If the land was transferred to the Trust by more than one settlor, the land needs to be transferred back to the settlors, and their proportionate interest in the land must be the same as it was at the time of the original settlement on the Trust.
The rollover relief will also be available in cases where the land was transferred to a Trust by a person in one capacity and then transferred back to the same person in a different capacity. For example, where Mum and Dad settle the property on a Family Trust and later receive the property back as equal shareholders of an LTC.
Rollover relief is available to the land transferred by the Trust to its original settlor and then settled onto a new Trust. The Government has acknowledged that consequential rollover relief should also be available for a pure resettlement transaction where the trustee of a trust transfers the land to a new Trust, where the principal settlor of the Old Trust is the principal Settlor of the New Trust and the requirements in relation to beneficiaries of Rollover Trust are met. Whilst this is not expressly provided in the current legislation, such rollover relief should be introduced in the next available tax bill.
Transfer of land to beneficiaries will not qualify for rollover relief.
LOOK THROUGH COMPANIES & PARTNERSHIPS
Rollover relief is also available to transfers of residential land to or from LTC’s and partnerships. The rollover relief will apply where the transfers of land results in the same proportional ownership interest in the land. As the transferee steps into the shoes of the transferor, the brightline acquisition date for the transferee is that of the transferor.
As mentioned earlier in case of Trusts, the full rollover relief only applies where the transfer is made for consideration that is less or equal to that of the transferor. If the consideration is greater than the cost, the transferor will realise a gain and the transferor will be taxed on their share of the actual realised gain.
Whilst Transfers to and from Look Through Companies is subject to rollover relief to the extent that the same proportional ownership of the land is maintained, the rollover relief does not extend to a transfer of shares in a LTC where the shares are transferred by the shareholders of LTC, who are also settlors of the Trust, onto a Family Trust and/or back to the original settlors. This is specifically covered by s CB 6AB (8).
PHASING OUT OF INTEREST – OLD LOANS
Interest incurred on or after 01 Oct 2021 on residential loans in place as at 27 March 2021 are subject to a progressive phasing out of the interest deduction as follows.
01 Oct 21- 31 Mar 22 75% of interest allowed
01 Apr 22- 31 Mar 23 75% of interest allowed
01 Apr 23- 31 Mar 24 50% of interest allowed
01 Apr 24- 31 Mar 25 25% of interest allowed
01 Apr 24 + 0% interest allowed.
ROLLOVER RELIEF FOR GRANDPARENTED RESIDENTIAL LOANS
Where there is a tax free rollover for the application of bright line rules, interest deduction is preserved for the transferee where the loan amounts are less or equal to the debt owing by the transferor where the original loan was in place on or prior to 27 March 2021
BRIGHTLINE TEST – FEW MORE THINGS
NEW BUILD
As mentioned before, for a New Build to qualify as such the land must be acquired no later than 12 months after it receives CCC. Whilst this may seem straightforward, one must be mindful of the 12 month period for example when acquiring already constructed homes or spec homes as the New Build classification may not be met. Where bare land is acquired the 12 months timeframe is not an issue as the purchaser would have owned the land by the time the CCC is issued for a newly constructed residence.
BRIGHTLINE PERIOD
The date of acquisition of the land determines the length of time that a person must hold the residential land before the property is sold without imposition of income tax, provided that no other land taxing provisions apply.
Property acquired:
- On or after 27 Mar 2021 qualifying as a new build is 5 years, or 10 years for all other properties
- Between 29 Mar 2018 and 26 Mar 2021 is 5 years;
- Between 01 Oct 2015 and 28 Mar 2018 is 2 years
APPLICATION OF THE LAND SALE RULES TO CO-OWNERSHIP CHANGES AND CHANGES IN TRUSTEES
On 14 Jun 2022 IRD released an interpretation statement IS 22/03. This statement confirms that for ownership change to be effected a complete alienation of property must be made. In other words one persons loses the ownership of the land and another person gains a corresponding interest in that land.
In summary:
- A change to the form of ownership that does not result in a change of proportional ownerhsip will not give rise to disposal for the purposes of land taxing provisions.
- If there is a transfer between co-owners where no owners interest is fully alienated but the proportional ownership is affected, there will be a disposal for the person whose ownership interest was reduced.
- If there is a transfer where either a new co-owner is added or a co-owner is removed, there will be a disposal for the person losing their ownership interest.
- IRD maintains that where parties own a block of land as tenants in common the division of that land so as to provide each party with a title equivalent to their former share in the larger block will constitute a change of ownership.
OTHER NOTICES
In case you or your loved ones qualify for the Cost of Living Payment that will be paid from 01 August 2022 you do not need to separately apply to IRD for this payment. If you are eligible IRD will pay this automatically to the bank account that they hold on file once your 2022 income tax return has been filed
