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Consultation Begins

The Government has released a discussion document on interest deductibility and the bright-line test extension, Sharon Cullwick has the details.

By: Sharon Cullwick

1 July 2021

In March the Government announced several changes to housing policies in response to a spike in house prices. These changes are aimed at helping first home buyers and disincentivising rental property providers. The changes included an extension from five to 10 years of the bright-line test for existing properties and the removal of mortgage interest as a deductible expense for owners of investment property. These changes will be implemented from October 2021 and are for properties purchased on or after March 27, 2021.

Feedback Requested

A consultation paper has been released and the Government is asking for feedback. Details of the discussion document named “Design of the interest limitation rule and additional bright-line rules” and accompanying summary sheets are available at taxpolicy.ird.govt.nz.

At the time the Government announced these changes impact statements had not been completed and so no understanding of the consequences had been established. Consequently, Government policy analysts from the Inland Revenue, Treasury, plus Ministry of Housing and Urban Development recommended Government did not remove mortgage interest deductibility for residential investment property.

The consultation or discussion document is 143 pages and asks for the preferences or options on the way the legislation is to be written. This consultation is limited to the technical aspects of the design.

The removal of interest as a deductible expense or “interest limitation rule” on existing properties limits the amount that can be claimed on mortgage interest costs. From October 1, 2021 it will be 75% of the mortgage interest, reducing by a further 25% each year until 2025. Beyond 2025 no mortgage interest will be deductible for existing properties.

New Builds

Exemptions are proposed for property developers and for owners of new builds. In addition, initial or early owners of new builds would be subject to a five year bright-line test, rather than the 10-year test. It is proposed a new build which has been added to residential land will generally be a self-contained dwelling with its own kitchen and bathroom, and will have received a code of compliance certificate. However, the discussion document does not identify how long a new build is a new build and therefore for how long you will be able to claim the interest as a taxable expense.

NZPIF is completely opposed to removing interest as a legitimate taxdeductible expense, especially as the Government plans to exempt Kāinga Ora, formerly Housing New Zealand, from the new rules, allowing it to continue to deduct interest as a business expense. NZPIF joined with Tenants Protection Association in Christchurch and The First Home Buyers Club to write to the Minister of Finance opposing the changes and requesting the withdrawal of this new policy. The removal of tax deductibility on investment properties does not help tenants or first home buyers as was intended. It is likely that there will be an increase in rents plus a reduction in rental property supply thus making it harder for first home buyers to save for a deposit. NZPIF presented this letter to five Government miministers, but the request was rejected.

The consultation document is open for discussion until July 12, and will be passed through Parliament by October 1, 2021. Property investors are encouraged to forward their submissions to make the most of the short period allowed.

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