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Diana Clement reports on the shock, confusion and uncertainty about critical details missing from the government’s housing policy package

Diana Clement reports on the shock, confusion and uncertainty about critical details missing from the government’s housing policy package

This article originally appeared in LawNews (ADLS) and is here with permission.


Property and tax lawyers’ telephones rang hot on the day after the government announced its controversial housing policy package late last month.

The removal of mortgage interest tax deductibility on investment properties has shocked investors and speculators alike. And alongside the shock, there is confusion and uncertainty about critical details which are still missing from the government’s package.

Exactly whom will be caught by the new interest deductibility rules? How will the family home exemption from the new, extended bright-line test work? The fine print which will, in many cases, determine whether investors and home owners are caught by the new rules remains frustratingly unclear.

These details, we are told, will be ironed out after some form of consultation. Again, it is not clear who will take part in this consultation and how long it might take.

Specifically, property owners are wondering how the government will define ‘own/family homes’ and ‘new builds’ when deciding who will be caught by the 10-year bright-line test and who can still claim full deductibility on mortgage interest. Family homes are exempt from the bright-line test and those buying new builds as rentals after 27 March can continue to deduct mortgage interest.

The definitions, once finalised, will have huge consequences for investors and some owner-occupiers.

The key changes for investors are:

  • The bright-line test (a tax on capital gains) is extended from five years to 10 for second-hand property, but remains at five years for new builds. Gains on own homes that switch back or forth to rental accommodation might also fall into the bright-line test regime.
  • Mortgage interest will no longer be tax deductible on rental properties bought after March 27 and will be phased out over four years for existing rentals. It is not yet clear whether new builds will be exempt from this rule, meaning landlords could still deduct mortgage interest. But this depends on how ‘new build’ is defined.

All this uncertainty makes it difficult to advise clients, says property lawyer Nick Kearney of Schnauer & Co.

What is an ‘own home’?

Owner-occupiers are said to be excluded from the bright-line test. Or are they?

If an own-home bought after 27 March switches to, or from, being the owner’s main residence and is rented for periods of more than 12 months at a time, the owner will pay income tax on the proportion of the profit made, less standard deductions. In the past, homeowners were caught by the bright-line test only if they rented out the home for periods totalling 50% or more of the time it was owned.

Former ADLS President Joanna Pidgeon, of Pidgeon Judd, says the new rules will make completing withholding tax statements more complex and the form will most likely need redrafting.

Some owner-occupiers let parts of their homes such as sleepouts to tenants, boarders, or short-stay guests. Or there may have both commercial and residential elements to a property. If a property has a mix of commercial and residential uses, the IRD looks at the predominant use. Business news website interest.co.nz reports that the government is still to decide whether interest can be deducted for residential properties which are also used as workplaces.

An alternative to the predominant-use concept could be a formula for apportioning deductibility based on the floor area or rental income generated by each type of usage, or it could just exempt them altogether.

Purely commercial property is excluded from the new policy rules.

What are new builds?

To encourage development, new builds escape the 10-year bright-line test (though the previous five-year rule will still apply). New builds might also escape the interest deductibility rules when owned by investors, but that is yet to be determined, says Pidgeon.

The big ‘if’ is the actual definition of a new build, which will be worked out in consultation with the tax and property communities over the coming months, but it is intended to include properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004.

But how might the new rules apply to investors who bought a house off-the-plans and had an unconditional agreement two weeks before 27 March, when the government’s new changes took effect?

Will this yet-to-be-built house be classified as an existing property for the purposes of interest deductibility because the purchasers had a binding sale and purchase agreement in place before 27 March? Or will it be classified as a ‘new build’ and, thus, subject to the five-year bright-line test rather than the new 10-year rule?  

Tax consultant Terry Baucher says it’s likely the government will be hit with an avalanche of submissions in its consultation process, and he expects it will be generous in its definition because it wants to encourage new builds.

Interest deductibility

Shockwaves reverberated around investment and professional communities at the new rules, especially the removal of interest deductions for residential property. They came out of the blue and were not signalled in advance, says Baucher.

Under the previous rules, residential investors could deduct the interest on loans in calculating their taxable income and this reduced their tax bill.

The government called it a loophole, but investors argue they are no different from any other business that can claim its costs. Baucher says it was an anomaly because investors used loans to derive capital gain but were taxed only on the rental income portion of their total return.

Whatever the government decides, it could have trouble collecting its dues on the bright-line test. Writing in interest.co.nz, Jenée Tibshraeny said compliance with the previous five-year bright-line test could have been below 50%.

More rules

Other rules in the Income Tax Act 2007 that can tax gains on the sale of land (including residential land) continue, regardless of when the property was purchased. That includes the associated persons rules for speculators, land developers and dealers. Rules still apply for property bought with the intention of making a capital gain. In that case, capital gains are taxable at any stage.

The bright-line tests potentially apply only if none of the other land sale rules apply.


This article originally appeared in LawNews (ADLS) and is here with permission.

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42 Comments

The only thing that saves us from the bureaucracy is its inefficiency- Eugene McCarthy

This is what happens when you don't tackle a problem (CGT) head-on. grab the popcorn and be ready for the show :)

Indeed, if all we wanted was policy formed by polling we should just do away with a prime minister altogether, smh.

It's entirely possible to replace the entire political establishment, with digitization. Of course they'd do everything they could conceive of to prevent that from happening. But in terms of improving efficiencies and eliminating ongoing costs, the political class will eventually go through the same restructure that others are facing.

True imo

This article brings up a point that it doesn't actually address head-one - owner occupiers who rent out room or two in their house to flatmates. I understand under the existing law they can claim for a portion of their mortgage interest back as an expense equivalent to the floor area of the rooms that are being rented out. So that sweetens the deal of renting rooms out in this way.

If this is removed, then people are going to be less inclined to rent rooms out in this way. For all the people saying "when a rental house is sold to an owner occupier, there is no change in the housing stock" - here's another case where the change in law may result in more demand for rentals, at precisely the same time rentals are being sold to become owner-occupier properties.

This is actually anecdotally extremely common. As a young person myself, everybody I know who has brought a townhouse or house has rented out 1 or more rooms. You can't afford not to when house prices are 10x incomes. You're also incentivised to buy a 3 bed+ if you can due to the lower price per sqm you pay and the greater ability to capture undeserved capital gains. The only people who don't seem to be doing this are those that buy apartments.

So will these people , as Lathanida suggests be likely to dispense with flatmates et al because they can or may no longer be able to claim a proportion of their mortgage interest as a deduction.

At sometime about a year ago I actually troubled myself to read the Inland Revenue tax guide and remember it explicitly stating that you could have two boarders each paying under $256 (or thereabouts) tax-free. When does a flatmate become a boarder? What constitutes being a boarder? If a house owner gets a couple of mates in to help pay the mortgage surely they are more boarders than renters i.e. their occupation in the house doesn't constitute renting under the Residential Tenancies Act or does it? Someone may know better.

I saw all the new build companies celebrating when these rules came out, however it seems like they are also slowly realising that no one wants to buy or build a million dollar asset with so much uncertainty.

Haha lol. People have money (also funny munny) and need somewhere to invest it, new housing will qualify for the 5 year BL that much is clear I think. And not everyone wants high risk tesla or other shares

When the OCR goes negative and mortgage rates follow the issue of interest deductibility will no longer be in issue.

Except retail mortgage rates won't go negative.

The banks are strongly against a negative OCR because they can't realistically impose negative rates on depositors - if your choice is to hold cash or put the money in the bank and have the value degraded, people will choose the former.

Does New Zealand have a rule or law that states depositors cannot receive negative deposit rates.
Indeed from recall, RBNZ's chief economist Yuong Ha provided a scenario of -5.0 percent in one of his memorable interviews.

It's the law of common sense.

Why would you put your money in the bank and receive -5% interest on it if you could just hold it as cash?

My initial comment was in regard to the OCR and mortgage rates ,and the quantifiable benefits of interest deductibility as mortgage rates / the OCR declines . It would appear that you have inserted deposit rates into the commentary which frankly has nothing to do with the article posted, nor my comment. .

Here is what you said:

Does New Zealand have a rule or law that states depositors cannot receive negative deposit rates.

Hence my reply.

This is my opening comment. "When the OCR goes negative and mortgage rates follow the issue of interest deductibility will no longer be in issue "to which your reply was " they can't realistically impose negative rates on depositors - if your choice is to hold cash or put the money in the bank and have the value degraded, people will choose the former. " Clearly you have raised the subject of negative deposit rates , and have decided to go smugly off tangent and comment on your commentary.

No, my reply to that statement of yours was this:

Except retail mortgage rates won't go negative.

I then also made a statement about negative deposit rates, as I had nothing further to say about negative retail mortgage rates other than they'll never exist, and part of the reason they'll never exist is because they will never offer negative deposit rates.

Don't worry, Lanthanide is on some crusade at the moment (maybe this is his/her regular thing?), deliberately misconstruing people's comments to engage in debate. Probably an e-thug.

Poor you, having to engage in such mind numbing piss taking debate

There is a reason why banks have been wanted to go cashless recently, many aren't aware of that. There is a strong push to eliminate cash, as it locks money in the financial system and gains a permanent hold over our money. Bail-ins, cashless society, smaller maximum dollar amount cash withdrawals, states blocking then regulating the crypto sphere. It's not about monitoring terrorism...it's about total financial system control.

That guy has future governor written all over him. Cream of the crop. Sharpest tool in the shed.

The RBNZ has a special facility specifically to manage this problem. Banks would not have to impose negative rates on depsoitiors, but rather, a 0% rate on depositors.

If the OCR goes negative 1% for example, then I assume we could see:

1% Mortgage Rates
1% Term Deposit Rates

The deposit rate would be 0% but yes the home loan rate would be about 1%.

It's entirely possible for mortgage rates to drop further. Banks won't be doing it right away, or they'd risk getting a public ticking off from the PM. But in the interests of a competitive mortgage market, and the dreadful state of fiat currency, it's more likely than not interest rates will drop further.

I hadn't spotted that there was the possibility that parts of a home which are used as workplaces could be eligible for interest deductions. Office = 5% of home by area (excluding the garage) used 2/7ths of the week for 1/3 of the day. It would be a paltry amount (around $2 deduction per week), but I'd welcome the opportunity to be able to claim on it...

Fortunately dreams are free.

They already are eligible. And it's just calculated as the floor area, not on hours per week. But it needs to be a room that is solely used for office purposes. If you have a mixed area that has substantial business use (such as a dining room with a large table) then you might be able to deduct 50% of that area.

You can also deduct rates, insurance, and portions of other fixed costs like phone lines. None of this is new.

When i worked from home, my accountant claimed for a bigger percentage of home costs based on the hours worked. And excluded the rooms not in use. A little more complicated but well worth it

What a fiasco once again from this Government.
The removal of interest deductibility is a loop hole ? Really, if anyone provides a service for money it is a business and is taxed, also this service in regulated think tenancy agreements, rental increase limits, healthy home regulation and suddenly it's not a business ?
I get that they wanted to change investor behavior but why not introduce these changes on transactions after March 27th, but no every existing renter is going to be affected - it's just a tax grab !
This Government DOES NOT CARE about anyone particularly the poor who they pretend to support.
There is/can only be one outcome from this and it is a reduction in the rental pool and an increase in rents along with a increase in the tax take.
It's truly sad this meddling will have so many unintended consequences particularly for those who can lest afford it !

But how many of these so called "businesses" are engineered to run at best a slight cashflow positive (after claiming deductions) putting their net tax contribution at 4/5ths of f##k all? Property investment has gone from a much needed service to an absolute scourge on society.

In Feb 2021, 3748 Investors borrowed a total of $1.856 Billion. This equates to a $495k average, or @ 60% LVR $825k purchase price.
For FHB, 2339 borrowers @ $1.182 Billion, which is an average of $505k per borrower.

Nzdan - But how many of these so called "businesses" are engineered to run at best a slight cashflow positive (after claiming deductions) putting their net tax contribution at 4/5ths of f##k all?
There probably are some engineered that way but that does not mean they all are ??
There very same could be said about any business large or small, actively engineered to minimize tax, even Spark do this with their ownership in the Southern Cross Cable, it's registered and has a it's office in Bermuda.

I have since edited my earlier comment.

Ownership of the Southern Cross Cable does not resign the next generation to a) borrowing large sums of money to compete with just as many (if not more) "investors" for a home or b) paying 2/3rds of a wage earner's weekly pay towards rent.

Seem to be backing off the claim they aren't a business pretty quick their bud. Pick your argument and stick with it.

I'm confused at your reply. Where did I back off my original claim?

Spark was given as an example of why rentals are a business and you ceased arguing about rentals not been a business and instead argued Spark isn't causing debt build-up etc. This is an example of moving to change the subject of the argument, in this case, from what is a business to what is, in your opinion, good for society.

Where the data from, please?

RBNZ C31
https://www.rbnz.govt.nz/statistics/c31
Columns C and E give you the total borrowing per month for FHB and Investor respectively.
For total # of borrowers, scroll to the right of the spreadsheet until you get to "Total Borrowers" headings, columns U and W of the spreadsheet.

If we didn't have rampant tax evasion - just pretend you're not investing for capital gains! - and resistance to perfectly reasonable application of a CGT then they wouldn't have to take different approaches such as this. There is a need to balance taxation and the intransigence of investors and their lobbyists has been a real problem in addressing this.

Crocodile tears for renters aside...

The tax system around property ownership is far too complex and is a very inefficient way of collecting tax.

Jenée Tibshraeny said "compliance with the previous five-year bright-line test could have been below 50%".

The inability to articulate clear rules only exacerbates the problem & I anticipate compliance will only get worse.
Perhaps the government needs to think about reducing red tape rather than increasing it.

NZ will struggle to increase productivity with so much time wasted on "fine-tuning" the rules.

Agreed. Make it simple. Just have a flat universal land tax, with a kicker for overseas ownership and land banking (unsued/undeveloped).

If rental properties were treated as normal buisness assets as the speculators suggest, then they would be liable for a capital gains tax. The depreciating book value allowed is to reflect the loss in value of a normal business asset as it expends its value in the process of generating profit. If the asset is then sold above its book value then capital gains tax is payable. Properties rarely depreciate so depreciation is not appropriate. However capital gains tax should still be applied if they are to be treated as normal buisness assets.