Tax Alert
HOUSING POLICY MEASURES CLARIFIED
The Government has released Supplementary Order paper no 64 (SOP) to the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill – in which they laid down the draft legislation in relation to the earlier announced housing policy. The SOP essentially confirms the following:
Start of the measures:
- The start of the new measures is effective 01 October 2021
Brightline Test:
- The 10-year brightline period will be reduced to 5 years in relation to land that qualifies as “New Build Land” (New Build).
- New Build is defined as a land to the extent to which it has a place that is configured as a self-contained residence or abode if a code of compliance certificate has been issued on or after 27 March 2020 evidencing that the place was added to the land, and includes land for which there is an arrangement in place for which there will be a self-contained residence or abode added to the land and a code of compliance certificate will be issued on or after 27 March 2020.
- The New Build definition is the same for the purposes of Brightline Test as well as the interest limitation.
Changes to the Main Home Exclusion:
Currently the main home exclusion from brightline test ensures that the property is not taxed if more than 50% of the property is used as a main home. The exclusion does not apply if more than 50% of the land is used for residential rental purposes, in which case the entire gain on disposal will be taxable.
The new rules propose to change the treatment where the main home portion is smaller than the rental property, so that any gain on sale will be apportioned. The gain that relates to the periods the property is used as a main home will not be taxed under the bright-line property rule.
Interest Limitation:
In essence there will be no interest deductibility from 01 October 2021 in relation to properties acquired on or after 27 March 2021, with interest deductions phasing out over 5 years for property acquired prior to 27 March 2021 (unless the property is a New Build).
Phasing out of interest deductions will be available where pre-27 March 2021 property is re-financed after this date, however the phasing out will be limited to the balance of the loan as at 27 March 2021. New borrowings or addition to existing borrowing in relation to pre-27 March 2021 property will be subject to the limitation of interest deduction in full.
The interest limitation will not apply to New Build for period of up to 20 years, irrespective of who the owner is, which provides greater certainty to the initial owner as well as subsequent owners.
Companies, that would normally enjoy automatic deduction of interest are brought within the scope of these limitation rules as well. In particular close companies (with 5 or fewer shareholders and land rich companies).
Properties not subject to interest limitation rules:
There are other exclusions from the Interest limitation which extends to retirement villages and rest homes, student accommodation, hotels and motels, bed & breakfasts, social, emergency or transitional housing, council housing, Maori collectively owned land, and land which is held on revenue account by land dealers, developers and builders’, farm land. Commercial property unrelated to the provision of residential housing is also not caught by these rules.
Phasing out of Interest Deduction:
For properties acquired before 27 March 2021, the interest deductions will be phased out from 1 October 2021 over next four years by 25% each year. No interest deduction will be available from 01 April 2025. This measure will have a significant impact on the after-tax profit from rental activities and the net cash position for highly leveraged Taxpayers, although Taxpayers with ring fenced rental losses will be able to use these and therefore soften the impact.
Phasing out of interest on pre-27 March 2021 properties
- 01 Apr 21 – 30 Sep 21 100% interest allowed
- 01 Oct 21 – 31 Mar 22 75% interest allowed (so 25% denied)
- 01 Apr 22 – 31 Mar 23 75% interest allowed (so 25% denied)
- 01 Apr 23 – 31 Mar 24 50% interest allowed (so 50% disallowed)
- 01 Apr 24 – 31 Mar 25 25 % interest allowed (so 75% disallowed)
- 01 Apr 25 100% denied deduction
Common Sense Prevails:
Previously denied interest deductions will be available as a deduction in the year the property is disposed of, if that disposal would give rise to taxable gain. The interest deduction will however be limited to the gain on sale.
Rollover Relief:
The SOP proposes roll over relief that will allow a transfer of ownership of the land without triggering the brightline rule from applying. In effect such transfers will be ignored. This will include certain transfers to Family Trusts, to and from Look Through Companies or Partnerships, provided that the beneficial ownership of the land has not changed and that the amount received on transfer is equal or less than the original cost to the transferor.
Where to from now?
Whilst these measures are still likely to be refined before the final enactment there is now a greater degree of certainty around the design of the proposed rules. Whilst measures proposed in relation to interest deductions may seem draconian in principle there is often the opportunity to restructure debt so that interest deductibility can be achieved. Such opportunities usually exist where the taxpayer has other income earning assets or own their own business.
We suggest you contact us if you have significant borrowings in relation to residential land or would like to change your investment strategy so we can determine what steps may be taken to preserve interest deductions.
If you have any questions please do not hesitate to ask any of us.
Your Team at Roberts & Associates Ltd
Phone: 09-9661370
