The Government has finally released a discussion document on the proposed changes to the bright-line rules and interest deductibility for residential property which it announced in March, and it is, to use the parlance of modern youth, a lot. 143 pages, to be exact
To summarise such a weighty tome into a blog post is beyond the talents of even your worthy correspondent. Furthermore, it’s a discussion document, so until we have the actual legislation we’re still guessing as to what this law will actually look like.
Even the summaries are about 10 pages, but here are the highlights:
- Proposals are included in relation to building a new dwelling, developing property for the purpose of adding a new dwelling, or purchasing a newly-built home within a certain time-limit. These are being considered for exemption from the new rules and would therefore be able to continue to deduct interest if the dwelling were used to earn income.
- Some types of properties, like retirement villages, motels, and houses on farmland are proposed to be excluded from the new rules, as will Kāinga Ora and its wholly-owned subsidiaries.
- Also intended to be excluded are B&Bs where the owner lives on the property, dwellings where a portion of a main home is used to earn income (e.g. from a boarder), and custom-built student accommodation. How the rules will apply to serviced apartments or mixed-use buildings (i.e. shops with attached flats) is up for debate.
- The government is proposing to allow technical changes in ownership to be ignored for the purposes of the new rules where the underlying economic ownership remains the same (i.e. property being settled on a family trust).
- Consideration is being given to whether non-deductible interest should be allowed as a deduction when a gain on disposal of property is subject to tax (i.e. a bright-line disposal).
- It is proposed that close companies (more than 50% owned by 5 or fewer people) will be subject to the new rules. Widely held companies would only be subject to the new rules if their assets were more than 50% residential land.
- Similar to bright-line, the proposals include bare land if it could be used for residential property.
The discussion document also includes proposals on what might be considered a new build. The IRD is suggesting the definition of a new build to include:
- A dwelling added to vacant land (including relocated/modular homes transported from elsewhere)
- An additional dwelling added to a property, whether stand-alone or attached
- A dwelling (or multiple dwellings) replacing an existing dwelling
- A dwelling created by renovating an existing one to create 2 or more. For example, turning a 6-bedroom dwelling into two 3-bedroom dwellings with their own bathrooms and kitchens
- A dwelling converted from commercial premises, e.g. an office block converted into apartments. It is proposed simply adding a bedroom to an existing dwelling would not be a new build.
Submissions have been required on whether renovating a previously-uninhabitable dwelling to a habitable standard should be included. Whether any subsequent owners of a new build are also exempt, and for how long, is yet to be decided.
Despite the massive scope of the consultation document, you don’t have long to weigh in on it. Submissions are due by 12 July. From there it’s barely 10 weeks until restrictions on interest deductions start, although the proposed rules are still intended to apply retrospectively to property acquired since 27 March 2021.
As with any significant new legislation, the actual rules once implemented could have significant changes from what’s been proposed in the discussion document. And of course, the application of the legislation to a particular set of facts will always be important.