Interest Limitation Law Set To Pass
Rollover relief and new build definitions have been clarified as the new tax deduction law looms, writes Anthony Lipscombe.
1 November 2022
Almost a year since the government announced rules to eliminate tax deductions on interest for property investors, the legislation has all but reached its final destination. The Select Committee report on the first draft of the legislation has been released and amendments have been made reflecting these recommendations.
Here are some of the notable changes in the latest draft.
“Rollover relief” is a concession in tax legislation that allows property to be transferred from one party to another without triggering the application of the bright-line rule, and without seeing the new owner denied the ability to claim interest because they have bought a non-exempt rental property on or after March 27, 2021.
In the initial draft, it was proposed that rollover relief would apply when property is transferred from an individual to a trust and an individual to and from a look-through company (LTC). Many submissions, including those from GRA, were made to the Select Committee about extending the types of transfers that qualify. Pleasingly, the legislators have listened, and rollover relief is going to be applicable in the following additional circumstances.
- Transfer of a property from a trust back to the settlor(s) who transferred the property into the trust in the first place.
- Transfer between two trusts where the principal settlor who transferred the property into the trust is the principal settlor of both trusts and there are common beneficiaries.
- From an LTC to a trust, where the owner(s) of the shares in the LTC is the principal settlor(s) of the trust and a beneficiary, and all other beneficiaries of the trust are “close family associates” of the principal settlor.
- From an individual to an LTC, where the shares in the LTC are held by the trust and the individual is the principal settlor of the trust and a beneficiary, and again all beneficiaries are close family associates.
Note these new rollover relief provisions apply to transfers on or after April 1, 2022.
There have been further clarifications to the definition of “new build” property. To recap, if a property is classified as a “new build”, interest incurred in relation to that property is deductible for 20 years from issue of the code compliance certificate (CCC), and the property is subject to a five-year bright-line period if acquired within 12 months of the issue of CCC.
Examples of properties now defined as new builds include the following.
- Earthquake-damaged property listed on the earthquake-prone buildings register and then remediated such that it is removed from the register on or after March 27, 2020.
- Leaky buildings where at least 75% of the dwelling is reclad and CCC issued after March 27, 2020.
- Relocating an existing dwelling on the same piece of land with CCC issued on or after March 27, 2020.
One of the big omissions from properties exempt from the interest limitation rules were boarding houses. In the initial draft there were exemptions for hotels, motels and hostels, but no explicit reference to boarding houses. In the latest draft there is a new classification known as “boarding establishments”, and these are exempt from the interest limitations.
A “boarding establishment” is a dwelling that has accommodation for at least 10 occupants in separate rooms that are not self-contained, with shared living facilities.
At the time of writing the legislation has passed through Parliament and is awaiting Royal Assent, but we do not expect that to be the final word. The haste with which it has been drafted and the inherent complexity means there will inevitably be subsequent amendments. We further note that the National Party has signalled it will reverse this if elected.
Please contact GRA if you are concerned about how these rules may impact you (www.gra.co.nz). In the meantime we will continue to monitor the evolution of this poorly thought through piece of tax policy – keep an eye on our Tax Changes Resources webpage (www.gra.co.nz/taxchanges- resources).