In March, the Government announced that it was proposing to limit interest deductions for residential rental investment properties beginning in October.
To summarise, the restrictions will begin from 1st October 2021. The amount of the restriction will depend on whether the interest is “grand-parented”. This is interest on debt drawn down before 27th March 2021, which relates to residential investment property acquired before that. The deductions will be gradually phased out over between October 2021 and March 2025. For “grand-parented” interest, deductions will be gradually phased out as per the below table:
|Date interest incurred||Percent of interest you can claim|
|1 April 2020–31 March 2021||100%|
|1 April 2021–31 March 2022|
|1 April 2021 to 30 September 2021 – 100%|
1 October 2021 to 31 March 2022 – 75%
|1 April 2022–31 March 2023||75%|
|1 April 2023–31 March 2024||50%|
|1 April 2024–31 March 2025||25%|
|From 1 April 2025 onwards||0%|
Some residential property is not subject to the interest limitation:
- Land outside New Zealand
- Employee accommodation
- Care facilities such as hospitals, convalescent homes, nursing homes, and hospices
- Commercial accommodation such as hotels, motels, and boarding houses
- Retirement villages and rest homes; and
- Main home – the interest limitation proposal would not apply to interest related to any income-earning use of an owner-occupier’s main home such as a flatting situation.
Non-deductible interest and bright-line test sales
Another change is to the ‘disposal of property subject to the interest limitation’ rule. The issue here is if interest has been limited, but the property has been sold and the gain on the disposal is treated as taxable, what are we going to do with the interest that was treated as non-deductible? Should it be a deduction on sale?
An extended 10-year period for the bright-line test is also a part of these major changes.
These changes primarily impact large investors, however, small investors with one or two properties face significantly increased compliance costs, relative to the size of their portfolio. Accountants and tax specialists will also find themselves with more work to do and more legislation to ensure compliance with.
If you have properties and you are concerned that you may be affected by these new changes and guidelines, talk to us to ensure you are properly advised. Contact Us to receive professional and qualified advice on tax and other matters today.