As most of you are no doubt aware, the Government has released its detailed interest deduction limitation proposals on the 29th September 2021 (initially announced back in March).

We are working through details in the proposals, but wanted to get you some high-level highlights.

We are happy to have a chat if you have queries.

KEY POINTS

• The rules will fully deny income tax deductions for interest on borrowing in relation to residential property acquired from 27 March 2021 and on a phased in approach for residential property acquired before that date, subject to certain exemptions summarised below.
• “New builds” will be exempt from the rules (interest will remain fully deductible), for residential property acquired on or after 27 March 2021.
• The new build exemption runs for 20 years from the date the code compliance certificate (CCC) is issued, and the exemption transfers with the property – i.e. successive owners also get the benefit of interest deductions (subject to normal rules governing deductibility).
• While property developers are not automatically exempt, the rules should have little or no impact on them because interest remains fully deductible for land acquired for a property development business / to construct new builds.
• Build-to-rent schemes should generally be unaffected during the development phase and for 20 years following completion of new builds.
• Conversions of commercial property into residential should constitute “new builds”, as well as subdivisions where the housing stock is being increased.
• Interest deductions that have been denied under the rules can be claimed against any taxable income on sale of the property (if the sale is subject to tax). For example, if an investor buys a non-new build rental property in 2022 and sells that property in 2026, they will be unable to deduct their interest expense when incurred, but can claim a deduction for the full amount (incurred between 2022 and 2026) against their taxable income under the bright-line test in 2026 when the property is sold. In effect, interest deductions are just deferred rather than denied if a sale is taxable.
• A shorter 5-year bright-line test (rather than the current 10-year test) will apply for new builds acquired on or after 27 March 2021.
• The 5-year bright-line test is only available where the property is a new build acquired within 12 months of the CCC being issued. If acquired 12 months after the CCC being issued, the normal 10-year bright-line test would apply.
• Roll-over relief will be available from 1 April 2022 for certain transfers between related parties, including transfers to most family trusts, partnerships, look-through companies, Māori authorities, and transfers as part of a settlement claim under the Treaty of Waitangi. This is in addition to the roll-over relief already available for relationship property settlements and amalgamations, and full relief for transfers on death. Roll-over relief will treat the transferee as having acquired the property on the date (and for the cost) that the transferor originally acquired it, for purpose of both the bright-line test and the phase-out of interest deductibility. There is no roll-over relief for transfers out of a trust (only in), or for transfers between family members (e.g. parents gifting an interest in residential property to children can have bright-line and interest limitation rule implications).
• Important note: because roll-over relief will only be available to transfer to family trusts from 1 April 2022, transferring an impacted residential property to a family trust right now could have significant adverse tax consequences.

We recommend discussing with the tax team.

For those who want more information, we have set out further detail below. I expect we’ll cover this material in further detail in an upcoming newsletters.

ADDITIONAL DESIGN DETAILS – Key dates and phase out rules

The general proposal is that from 1 October, interest will not be deductible for residential property acquired on or after 27 March 2021. This rule is subject to various exemptions for new builds, development properties, certain entity types, etc. discussed below.

For properties acquired before 27 March, the ability to deduct interest is being phased out between 1 October 2021 and 31 March 2025. 75% of the interest expense will be deductible between 1 October 2021 and 31 March 2023; 50% deductible from 1 April 2023 to 31 March 2024; and 25% deductible from 1 April 2024 to 31 March 2025.

For properties acquired before 27 March, the phase-out rules will still apply to loans that are refinanced, but only up to the level of the original loan amount that qualified for the phase-out.

There is some roll-over relief for properties acquired before 27 March but subsequently transferred to associated persons, for example transferred to a family trust. That property will still be treated as having been acquired before 27 March and be eligible for deductions under the phase-out rules. Similar relief is available for properties transferred under relationship property settlements and transfers on death (i.e. these do not re-set the effective acquisition date for purposes of phase out eligibility).

New build and property development exemptions

“New builds” of residential properties are exempt, where a new build is generally a residence that receives a Code Compliance Certificate (CCC) on or after 27 March 2021.

A key point to note is that new builds will remain exempt for 20 years from the date the CCC is issued and the exemption transfers with the property to anyone who owns that property during the 20-year period. Residential properties completed from 27 March 2021 onward therefore have special status and will no doubt be preferred by investors relative to housing stock that existed before 27 March.

Conversions of existing dwellings into multiple dwellings and of commercial buildings converted into residential dwellings can also qualify as “new builds”.

Prior to the CCC being issued, the property should also be exempt if:

• the owner holds the land as part of a development, subdivision or land-dealing business or a business of erecting buildings on land (the “land business exemption”); or
• although it’s not the owner’s business, the owner holds the land to develop, subdivide or build on to create a new build (the “development exemption”). Interest incurred in relation to remediation work will typically not be deductible unless the work is significant enough for the property to constitute a “new build” once the remediation work is completed.

This does not mean that property developers are automatically fully exempt, although in practice the rules are unlikely to have a material impact (if any) given interest incurred on property developments remains fully deductible.

ENTITIES IMPACTED

The rules will not apply to most widely held companies (companies that are not “close companies”) provided less than 50% the company’s total assets by value are, broadly, affected property types (properties for which interest deductions are generally disallowed). This means that for most companies that hold some residential property incidental to their main business, the rules should not apply to deny any of their interest deductions.

Widely held companies that exceed the 50% threshold and companies that are “close companies” (5 of fewer individuals or trustees own more than 50% of the shares) will need to apply the rules to any affected properties; this may result in a denial of a portion of their interest expense. There is some complexity around how interest expenditure will be traced (or deemed to be traced) to affected properties.

There is an exception for Māori authorities (and companies wholly-owned by Māori authorities or eligible to be Māori authorities) which will treat them as widely held and subject to the 50% threshold even if they technically qualify as “close companies”.

Community housing providers that are not tax exempt will not be impacted to the extent their interest expenses relates to properties used for emergency, transitional, social and council housing.

Kāinga Ora and its wholly-owned subsidiaries will also be exempt from the rules.

OTHER PROPERTIES EXEMPT FROM RULES

In addition to new builds and development properties, certain other residential or quasi-residential types of properties are unaffected.

This includes:

• The portion of a main home used to earn income (e.g. if the owner has a flatmate or boarder);
• Retirement villages and rest homes;
• Hotels, motels, hostels, etc.
• Houses on farmland;
• Bed and breakfasts (where the owner lives on the property);
• Employee and student accommodation;
• Property used for emergency, transitional or social housing when leased to the Crown (e.g. HUD or Kāinga Ora) or to a registered community housing provider (CHP); and
• Land outside of New Zealand.

Residential land collectively owned by a Māori authority (or an entity eligible to be one) and used to provide housing to a member of the relevant iwi or hapū (papakāinga and kaumātua housing) and land transferred as part of a Treaty settlement and certain types of Māori land title will also be unaffected.

BRIGHT-LINE TEST CHANGES

In addition to the interest deduction limitation rules set out above, the SOP includes the previously announced addition of a separate 5-year bright-line test for “new builds”. For purposes of this rule, a person is only eligible for the 5-year test (instead of the normal 10-year test) if they acquired the property no later than 12 months after the CCC was issued, and the CCC must have been issued by the time the property is sold.

As a final and welcome change, there is proposed roll-over relief from the bright-line tests (both 5-year and 10-year tests) for transfers of property in certain related party contexts. For example, transfers to most family trusts will no longer trigger the test and re-set the acquisition date. Similarly, roll-over relief is available for transfers of property to partnerships and look-through companies. There will also be roll-over relief for transfer of land subject to the Te Ture Whenua Māori Act 1993 and transfers to trusts as part of settling Treaty claims.

It’s important to note, however, that this roll-over relief will only be available for transfers occurring on or after 1 April 2022. This means that there may be a significant disadvantage to transferring impacted property between now and 31 March 2022. For example, it might be disadvantageous to transfer any residential property to a family trust at the moment, unless that property used exclusively as a main home and that use is not expected to change in the next 10 years.

The Team is here to help – please contact a Senior member of the Team if you have any questions.

The final release of our Business Transformation programme will go live as planned in late October. As with previous releases, they are migrating their systems over a public holiday to reduce the number of business days that they need to be closed. They will close at 3pm on Thursday 21 October and will reopen on the morning of Thursday 28 October.

The IRD understands with their system shut down, that businesses may struggle to file and pay GST and provisional tax by 28 October. Ministers have agreed (dependent on passing an Order in Council) that businesses and individuals will now have until 4 November to file and pay.

If you would like to file before the IRD upgrade their services, you can do that before 21 October. Or you can have a look at the changes that are coming up at ird.govt.nz/changes-intermediaries, and file once their services come online again.

Ways IRD can help if COVID-19 has impacted your ability to pay – these include;

• setting up an instalment arrangement in myIR to pay off the tax over time. If COVID has impacted your ability to file or pay, please let us or IRD know as soon as you can as you will not be charged penalties and interest as long as you keep to the terms of the arrangement to pay off the outstanding tax. This can be set up before IRD close down their systems for the release, or from 28 October.
• sending IRD a note in myIR to explain the situation and they will take that into consideration.

IRD key services will be unavailable;

• myIR secure online services and Gateway Services will be unavailable and their phone lines and offices will be closed from 3pm Thursday 21 October until the morning of Thursday 28 October.
• if you have a direct debit or automatic payment set up with your bank to process whilst IRD are shut down, this will be processed once they reopen on 28 October. The effective date will be the date you’ve requested the payment to be made, not the processing date.
• All drafts, such as returns and secure mail, will be deleted during the upgrade process. If you have saved any drafts in myIR, make sure you finish them before 3pm on Thursday 21 October, so you do not lose them.
• Employment Information (EI) returns for payday filing that are due over the closure can be filed early if you’re able to. The days during the temporary shutdown won’t count as working days for filing periods. Filing can be completed up to 3pm on Thursday 21 October and can be resumed from the start of business on Thursday 28 October.
• For more information on the service closure visit ird.govt.nz/service-update

Research shows there are five simple things you can do as part of your daily life – at work and at home – to build resilience, boost your wellbeing and lower your risk of developing mental health problems. These simple actions are known internationally as the Five Ways to Wellbeing.

The Five Ways to Wellbeing are – Connect, Be Active, Keep Learning, Give, and Take Notice. They help people take care of their mental health and wellbeing. Regularly practising the Five Ways is beneficial for everyone – whether you have a mental health problem or not.

Why the Five Ways work:

• Connect: Strengthening relationships with others and feeling close to and valued by others, including at work, is critical to boosting wellbeing.
• Keep Learning: Being curious and seeking out new experiences at work and in life more generally positively stimulates the brain.
• Be Active: Being physically active, including at work, improves physical health and can improve mood and wellbeing and decrease stress, depression and anxiety.
• Give: Carrying out acts of kindness, whether small or large, can increase happiness, life satisfaction and general sense of wellbeing.
• Take Notice: Paying more attention to the present moment, to thoughts and feelings and to the world around, boosts our wellbeing.

The Five Ways in action:

• Connect with the people around you. With family, friends, colleagues and neighbours.
• Keep Learning. Try something new. Rediscover an old interest. Take on a new responsibility at work.
• Be Active. Go for a walk or run. Step outside. Garden. Play a game.
• Give. Do something nice for a team mate. Thank someone. Volunteer your time.
• Take Notice. Remark on the unusual. Notice the changing seasons. Savour the moment.

Johnston Associates has decided to provide more regular information via social media channels – namely Facebook and LinkedIn. We will continue to publish our quarterly newsletter, but you will find more regular and timely information through these channels.

So choose your preferred outlet by clicking on one of the buttons below, and don’t forget to follow us!