Does the extended bright-line test or the phasing out of interest deductions affect you?

The Government has released a 143-page discussion document outlining details on how to restrict interest deductions on residential investment properties - affecting around $82 billion of debt in New Zealand.

The purpose is to fix this country’s “long-standing housing affordability problem” and ensure more owner-occupied housing, sustainable house prices, and a competitive housing market.

What does this mean for you as a residential property owner?
It is important to realise that this is only a discussion document for public consultation (closing 12 July 2021) and NOT final legislation. It is likely the rules might change over the next few months.

It is also important to bear in mind that the proposed changes do not affect a person’s main home. However, the main home exemption definition is very complex, and we strongly suggest you seek professional advice in terms of how the main home exemption applies.

Key points:
  • Interest on a mortgage on a residential investment property (acquired before 27 March 2021) will be gradually phased out between 1 October 2021 and 31 March 2025.
  • Interest on residential investment property acquired on or after 27 March 2021 would immediately cease to be deductible from 1 October 2021.
  • If you sell a residential property acquired after 27 March 2021 within 10 years of its purchase, you are likely to be pay income tax on any gain made due to an increase in the value of the property.
  • Land outside New Zealand would be excluded from the new rule as would some other types of properties.
  • Exemptions are proposed for property developers and for owners of new builds. In addition, initial or early owners of new builds would be subject to a five year bright-line test, rather than the 10-year test.
  • Any gains made on the disposal of your main home could also be subject to tax if there were periods when it was not your main home.
What is “residential land”?
  • Land that has a dwelling on it
  • Land where the owner has an arrangement to build a dwelling on it
  • Bare land that may be used for erecting a dwelling under the relevant district plan
  • Land that is used for providing “short-stay accommodation e.g.  AirBnB
It does NOT include:
  • Farmland
  • Hotels and motels
  • Land used predominantly as business premises (excluding land used for short-stay accommodation).
When did you acquire the property?
Inland Revenue has provided a 24-page interpretation statement to clarify this, so it is not a straightforward answer. We would urge you to check this out with care.

Will you be affected by the extension to the bright-line test?

Denial of interest deductions
Property acquired and loan taken out before 27 March 2021:

1 April 2020 to 30 September 2021 – 100%
1 October 2021 to 31 March 2023 – 75%
1 April 2023 to 31 March 2024 – 50%
1 April 2024 to 31 March 2025 – 25%
1 April 2025 onwards – 0%

You can read the full discussion document here.

As always, your Moore Markhams advisor is ready to discuss your specific situation so please give us a call.

Here are links to specific Inland Revenue papers that may be helpful: