New Zealand: Discussion document, consultation regarding “housing tax”

The consultation period ends 12 July 2021.

The consultation period ends 12 July 2021.

The government on 10 June 2021 released a discussion document for public consultation regarding the “housing tax.”

The discussion document provides more details about the proposed interest limitation rules and related “bright-line tax” issues. The consultation period ends 12 July 2021.

Property subject to the interest limitation rules (and not)

Generally, the new interest limitation rules would apply to residential property that is rented to tenants. However, proposed exclusions would include:

  • Residential property outside New Zealand
  • Employee accommodation
  • Farmland
  • Care facilities such as hospitals, convalescent homes, nursing homes, and hospices
  • Commercial accommodation such as hotels, motels, and boarding houses
  • Retirement villages and rest homes
  • Income-earning use of an owner-occupier’s main home (such as a flat-rental situation)

How the interest limitation rules would work in practice

Tracing rules are proposed when a loan is used for multiple purposes. These rules would determine whether interest is subject to the new rules. Alternative approaches are considered as transitional measures.

Under the proposed tracing approach:

  • Borrowing solely for non-residential rental purposes would be unaffected.
  • Interest deductibility would not be affected if security or collateral for a loan is residential property. Instead the purpose of the borrowing would be the important feature.

“Close companies” (those with five or fewer shareholders owning more than 50%) and widely held companies with assets that are more than 50% residential land would not be able to apply the automatic interest deduction for companies. Instead, they would need to apply the tracing rules. An “interposed entity” rule would apply to residential rental property held through companies, trusts, and other entities. 

Refinancing a loan entered into prior to 27 March 2021 would not result in loss of interest deductions from 1 October 2021 (instead, a phased approach would apply).

Special rules are also proposed to deal with revolving credit facilities and offset loans offered by banks. The discussion document proposes “high watermark” rules to limit interest deductions based on the level of borrowing that was in place as at 27 March 2021. 

“New build” definition and period

The discussion document proposes that the term “new build” be defined as when:  

  • A dwelling is added to vacant land
  • An additional dwelling is added to a property, whether stand-alone or attached
  • A dwelling (or multiple dwellings) replaces an existing dwelling
  • Renovating an existing dwelling to create two or more dwellings
  • A dwelling is converted from commercial premises such as an office block converted into apartments

The discussion document proposes that “early owners” (those that acquire a new build no later than 12 months after its Code Compliance Certificate (CCC) is issued or add a new build to their land) would be eligible for the new build exemption from the interest limitation rules.

Other issues

The discussion document covers a range of other technical and transitional issues including:

  • A proposed exemption from the interest limitation rules for residential property development, including when a development is by a non-developer (e.g., when they undertake a subdivision, development or building to create one or more new builds).
  • When remediation work (e.g., in relation to uninhabitable buildings) would qualify for the development exemption
  • Whether an interest deduction would be allowed at the time of disposal of a property that would be subject to tax (e.g., under the “bright-line test” or the other land taxing provisions)
  • Rollover relief (from both the bright-line test and interest limitation rules) when property is transferred to a trust and for transfers when there is no significant ownership change

KPMG observation

Based on tax professionals’ understanding of the proposed legislative track, legislation would be introduced later this year for changes that would be effective and apply from 1 October. In effect, this means that work on the legislative design of the rules could still be in process when taxpayers would already be subject to them—thereby presenting challenges regarding provisional tax payments and recordkeeping, among other items.
 

Read a June 2021 report prepared by the KPMG member firm in New Zealand

 

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