Q

I would like to rent my owner-occupied property which is debt free and leverage its equity (redraw facility) for a future home and income property purchase in Australia. What would be the optimal tax structure to hold this property? Selling to an LTC or trust won’t gain interest deductibility anymore but could capital interest cost losses be offset against the capital gains tax payable down the line?

A

There are some relatively complex tax issues that are potentially relevant here. First, interest incurred on money you borrowed to buy a home is not going to be deductible. On the other hand, interest incurred on money borrowed to buy a rental property in Australia will be deductible. The new rules prohibiting the deductibility of interest on residential rental properties do not apply to rentals outside NZ.

As for the structure for the existing home that is going to be a rental, in years gone by it would have been likely that you would have been best served selling the property into a rental company. Now, however, this will not allow you to structure your bank debt in a more effective manner – unless the existing home qualifies as a new build. As you suggest, interest that is not able to be claimed as a deduction in relation to a residential rental property can be claimed later if that property is sold in a taxable sale. In your case, though, if that property is your current home that you have owned for long enough to fall outside the brightline period, it may be that you can sell it in the future without needing to pay tax, so there would be no taxable gain to be offset by any denied interest deductions. Also relevant are the proposed new rollover relief rules which might provide a means of moving the property into trust ownership without triggering disadvantage in relation to the bright-line rule. The bottom line is to get specialist advice, as there are some complex issues here, not least of which will include how you account for a rental property in Australia under the New Zealand tax rules. There are a number of tricky traps that can arise in that context.

– Matthew Gilligan

Backyard Subdivison

Q

We rent a property with a large back yard that has council consent to subdivide. We have noticed contractors down our drive surveying land. When approached they advised they were sent by the home owner to quote on a retaining wall to commence construction of a house next month. The property manager has confirmed land was subdivided during our active tenancy agreement. Is this lawful considering the use of the land has now been taken from us and construction poses an impediment on our quiet enjoyment?

A

I don’t believe that your landlord has breached the Residential Tenancies Act (RTA) by subdividing the property during your tenancy. This just normally involves lawyers and the council once surveying of the property has been completed. If your lease includes the land the property owner intends subdividing and building on, then one would expect this will have a substantial impact on you. Not only will your quiet enjoyment of the property be impacted (which would probably amount to a breach of section 38 of the RTA) but you could also argue that your overall tenancy has been, or will be, impacted by you no longer having access and enjoyment of the area to be built on.

My advice would be to firstly consider what the overall impact on your tenancy is likely to be. If you decide that you are not prepared to give up the access and use of the land to be subdivided then tell your Property Manager. You may decide that you can “give up” access to the land in which case you would almost certainly be entitled to some kind of rent relief for the loss of the land and the impact any building on the site might have.

- Ryan Weir

Interest Break On New Builds

Q

Although interest deductibility applies on new builds used for rentals for 20 years with code of compliance certificate after March 27, 2020 irrespective of who the owners are over that period, is it claimable by everyone else including new home buyers? That is how I read it but clarification of this point would help many facing the very high costs of buying a new home, especially first home buyers.

A

The fundamental requirement for there to be a nexus between the interest cost and taxable income flowing from the asset acquired remains a requirement for interest to be deductible with a new build. So interest is claimable off a new build acquired to derive rental income or is deductible if the property is purchased for on sale. A first home buyer buying to live in the property is unable to claim interest regardless of whether it is a new build or not.

– Mark Withers

Bright-Line And Family Trusts

Q

Under current changes to the property legislation, if I transfer properties (I have a few) from LTC to family trust would the transferred property attract the bright-line test? Also, if the shareholding of LTC directors changed would the bright-line test apply to this scenario?

A

If you transfer properties from your LTC to a family trust, they will be subject to a new brightline period in the family trust, which could be the new 10-year period. As things stand, the transfer of property from an LTC to a family trust is a disposal from the perspective of the LTC and an acquisition from perspective of the trust, triggering a restart of the bright-line period.

On top of this there may also be a taxable gain triggered from the point of view of the LTC if any of the properties still sit within their initial bright-line period. The moral of the story is that you would want to be very careful about transferring properties out of your LTC.

The same outcome likely arises if you transfer the shares in the LTC. The transfer of shares in an LTC is treated as the same as transferring the properties themselves. Note there is a de minimis provision that involves a complex calculation to determine if a $50,000 threshold is breached. However, the moral of the story here is the same - be very careful about transferring shares in an LTC.

While this is my answer as things stand now, you may be aware of the introduction of new “rollover relief” rules that will allow property to be transferred into trust ownership without triggering the same negative tax consequences. Unfortunately, as that law is currently drafted it does not apply to transfers like you have proposed here. GRA has submitted on the draft legislation suggesting that it should be broadened to cover these scenarios, so hopefully in the future if you ask me the same question I will be able to provide a different (better) answer.

– Matthew Gilligan

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