Since the Government’s announcement in March, regarding the tax deductibility of interest on residential investment properties and the extension of the bright-line period to 10 years, investors have been waiting for more detail on the new rules.
On 10 June 2021, Inland Revenue released a 143 page discussion document titled “Design of the interest limitation rule and additional bright-line rules”, which provides further clarification on the proposed rules and seeks feedback on certain elements.
In March it was signalled that ‘new builds’ would be exempt from the changes, i.e. interest would remain tax deductible and the brightline period would remain at 5 years. Hence, the detail surrounding what comprises a ‘new build’ has been eagerly anticipated.
Based on the content of the discussion document, to comprise a new build, a code of compliance certificate (CCC) must have been issued on or after 27 March 2021.
The discussion document reveals three categories that new builds can fall under. The first is a simple new build, where one or more self-contained dwellings are added to bare residential land. This also applies to relocated and modular homes, or where an existing dwelling is replaced. The second is a complex new build. This is where one or more self-contained dwellings are added to residential land that already has an existing dwelling on it, without separate title being issued for the new build portion of the land. This includes adding standalone dwellings, attaching new dwellings into existing dwellings and splitting existing dwellings into multiple dwellings. Finally, commercial to residential conversions are also considered new builds.
However, before you can take advantage of the new build exemption, you must also be an ‘early owner’. This is someone who acquires a new build either before the CCC is issued or no later than 12 months after it is issued. The Government is also considering whether subsequent purchasers of a new build can continue to deduct interest and for how long. There are three options:
- In perpetuity for early owners.
- In perpetuity for early owners and a fixed period for subsequent purchasers.
- For a fixed period for both early owners and subsequent purchasers. There are a number of questions yet to be resolved. For example, if the sale of a residential house is taxable under the brightline test, can past non-deductible interest be deducted against the profit?
Consultation closed on 12 July 2021; therefore, we expect to see a bill introduced to Parliament soon. Given the content of the discussion document, we expect the legislation will be complex. This is a concern, given the wide reach of who the new rules will apply to.