Some Tax Law Quirks Worth Noting
Mark Withers takes a close look at the government’s property tax changes now in place.
1 June 2022
Enacting legislation bringing into force the government’s property tax changes has finally been passed. To date, advisors have been forced to guide clients based on policy announcements, but with legislation now in place there are a few quirks worth exploring in more detail.
This article points out a few specifics worth noting.
10-Year Bright Line
- The definition of residential land includes all land configured as a dwelling, so operating a short-term let business from a property configured as a dwelling is not sufficient to get you beyond the rules.
- Where a contract has been passed to a nominee, the acquisition date is the date of the nomination, not the date of the contract.
- To be a new build under the five-year bright-line the property must have a CCC issued after March 27, 2020, and the acquisition date must be within 12 months of the CCC being issued.
- A new build will include leaky buildings that are remediated where 75 per cent of the cladding is replaced where CCC for the remediation is issued after March 27 2020.
- If a minor dwelling is added and gains CCC after March 27 2020, the minor dwelling is the new build; apportionment will be required for the original dwelling.
- The main home exemption now contains an apportionment provision, meaning that if you have not lived in the home for more than 12 months during ownership any gain must be apportioned and taxed accordingly if sold within the bright-line period.
- Limited rollover relief has been introduced for movements of property between trusts and their settlors, but this does not yet extend to trust resettlements. More legislative change is required to give effect to this.
Interest Deductibility Removal
- If a loan was taken out before March 27, 2021 and can’t reasonably be determined as being used for any particular property purchase, the loan will be treated as being used for nonresidential property first, and then the balance for residential property.
- As with bright-line, interest deductions are denied if the residential property is configured as a dwelling, regardless of whether it is used as a dwelling.
- Residential land leased to registered community housing providers is exempt.
- Interest incurred by those in the business of dealing in residential land, dealers, developers and builders, remains deductible as their gains are taxable.
- Loans for remediating leaky rental buildings where 75 per cent or more of cladding is replaced and CCC. is issued after March 27, 2020 will remain deductible as new builds
- Interest on new builds remains deductible regardless of who owns the building for 20 years from the date the CCC is issued provided the CCC is issued after March 27 2020. No requirement for acquisition to be within one year of CCC being issued.
- Refinancing up to the level of an original loan will not affect deductibility.
- Deductions for interest on variable flexi finance lending will be set based on the loan balance as at March 26 2021.
- Where lending can’t be traced to an allowed property or a disallowed property, deductibility will be determined by the market value of allowed property rather than the cost of the allowed property.
Overall, the detail of these new rules adds significant complexity to compliance with what was a relatively simple area of law. The IRD guidelines on interpreting these rules is a document 240 pages long.
Real care will be needed now to navigate the new 10-year bright-line and interest deductibility rules and the new requirements are certain to add to taxpayer compliance costs.