The Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Act 2022 effects these changes from 1 October 2021. Taxpayers must comply with the new law will be when they file their 2021/22 tax returns (ie, by 7 July 2022, or by 31 March 2023 for those taxpayers with accountants that have an extension of time for filing returns).
The proposals are complex and detailed, but in broad terms:
- For residential property acquired on or after 27 March 2021, interest incurred from 1 October is no longer deductible
- For residential property acquired before 27 March 2021, interest deductions are phased out over the next 3 years, with nil interest deductibility from 1 April 2025 onwards
Period interest incurred - % of interest able to be claimed for pre-27 March 2021 land
1 Oct 2021 to 31 Mar 2022 - 75%
1 Apr 2022 to 31 Mar 2023 - 75%
1 Apr 2023 to 31 Mar 2024 - 50%
1 Apr 2024 to 31 Mar 2025 - 25%
1 Apr 2025 and afterwards - 0%
There are some exceptions to these rules, including:
- New builds: Interest incurred in relation to “new build land” continue to be fully deductible. “New build land” is land with a self-contained residence, provided that a code compliance certificate (CCC) has been issued for it on or after 27 March 2020. Hotels and motels that are converted into self-contained residences will also qualify, as will modular and relocated homes, and purchases “off the plans”. Interest can be deducted for 20 years from the date the CCC has been issued, regardless of a change in ownership (in other words, the exemption attaches to the land, not the taxpayer who owns the land).
- Dealers, builders and developers: Interest deductions will continue to be available for land dealers, builders and developers who are subject to tax on disposal. There is also an exemption for taxpayers who are not in business as developers, but who carry out development work that results in a new build.
- Emergency, transitional, social and council housing
- Employee and student accommodation
- Some Maori land
Other points to note:
Close companies (companies with 5 or fewer natural person or trustee shareholders who hold more than 50% of the shares) are subject to the new interest rules, regardless of the proportion of assets that are residential rental properties.
Non-close companies that are “residential land companies” have to comply with the new rules, ie companies that have 50% or more of their total assets as residential rental property.
Wash-up for taxable disposals of land. Interest deductions denied under the proposed new rules may be claimed in the year that the residential land is disposed of, provided that the disposal is taxable.
Inland Revenue has released a set of information sheets providing general information about how the proposals are intended to work.