On 30 March 2022, the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Act 2022 received Royal assent. Its passing into law brings with it the extension of the residential bright line period from 5 to 10 years and denial of interest deductibility for residential investment properties. The legislation itself is complex and difficult to interpret because it has been written with numerous potential fact scenarios in mind.
- The 5 year bright line period is extended to 10 years for properties purchased after 27 March 2021.
- Interest deductions will not be allowed for properties purchased after 27 March 2021.
- For properties owned prior to 27 March 2021, interest deductions will be phased out over time from 1 October 2021.
However, if a property meets the definition of “new build land”:
- the bright line period remains at 5 years for a person if they acquired it within 12 months of it meeting the definition of “new build land”, and
- interest will remain deductible for 20 years after the date the code compliance certificate was issued, including for subsequent purchasers of the land.
As a result, the definition of what comprises “new build land” is important. There were additions to the definition of “new build land” from when the bill was initially introduced. In its final form, “new build land” includes:
- land with a self-contained residence that was issued a code compliance certificate on or after 27 March 2020,
- land where there is an agreement to add a self-contained residence and a code compliance certificate will be issued on or after 27 March 2020,
- land that had a hotel or motel that was converted to self-contained residences and the conversion was completed on or after 27 March 2020 as evidenced by Council or building consent records,
- a dwelling that has been on the earthquake-prone buildings register, but remediated and removed from the register on or after 27 March 2020, as evidenced by a code compliance certificate issued on or after 27 March 2020 or Council records, and
- where the cladding of a leaky home has been substantially (at least 75%) replaced and a code compliance certificate was issued on or after 27 March 2020.
As alluded to above, the rules become more complex in non-standard situations. For example, if a person completes a subdivision, their acquisition date for the resulting land dates back to when the title for the undivided land was registered to them. But if a person acquires land as a result of a subdivision completed by another person, their acquisition date is when they entered into the agreement to acquire the subdivided land.
If subdivided land has both an ‘old’ house and a new build constructed on it, then the portion of the land on which the new build is constructed may qualify as “new build land”, while the balance would not. This type of scenario can then give rise to apportionment issues in relation to interest expenditure and application of the 5 year versus 10 year bright line periods.
Care needs to be taken when applying the rules to ensure the relevant provisions are first identified and then correctly interpreted.