Have your say! Chinese Building Industry Association invites feedback on how new property tax rules will work

On 10 June, a public consultation document led by the Minister of Finance and the Minister of Revenue was released, seeking feedback on the proposal's implementation details. Its main points include: 

1. Deductions for mortgage interest on residential investment properties purchased before 27 March 2021 will be phased out between 1 October 2021 and 31 March 2025. Interest deductions for other properties will cease immediately from 1 October 2021. 

2. Land outside New Zealand will be excluded from the new rules, as will many other types of property. Exemptions are proposed for property developers and owners of new builds.

3. In addition, owners of homes defined as new builds will be subject to a 5-year bright-line test rather than a 10-year test.

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The 143-page consultation document covers the following main topics: 

1. Changes to interest deductions;

2. Who will be affected by the changes to interest deductions?

3. What types of property will be affected by the changes to interest deductions?

4. The treatment of new builds under the bright-line test and changes to interest deductions;

5. The development exemption;

6. Should interest deductions be allowed when a property is sold?

7. Changes to the bright-line test.

  

The proposal's aim: increase supply and prevent investors from competing with first-home buyers for existing housing stock

In this document, the Government primarily seeks views on new-build exemptions and tax rules, with proposals to end interest deductions for residential investment properties other than new builds. 

The Minister of Finance said, “The Government aims to improve affordability for first-home buyers by curbing investor demand for existing housing stock, thereby encouraging development. This proposal will help achieve that goal”。

The Minister of Revenue also said, “The proposed exemptions for property development and new builds should help increase supply, directing investment towards adding to the housing stock and avoiding direct competition with first-home buyers and owner-occupiers for existing homes.”

The consultation report also discusses the definition of a new build. In general, it proposes treating a dwelling with a kitchen, a bathroom and a Code Compliance Certificate (CCC) as a new home. IRD proposes that a home be considered new for 12 months after receiving its CCC. New homes would be subject to the previous 5-year bright-line rule, and loan interest could also be deducted as an expense for tax purposes. The exact duration of the exemption is also open for consultation. 

What other definitions of new builds will apply? Consultation on the report closes on 12 July 2021, with the rules taking effect on 1 October 2021.

Please scan the QR code to visit IRD's website and read the consultation document.

 

#01 The consultation document's main proposals are:

1. From 1 October 2021, deductions for interest expenses on investment properties will be restricted;

1. Mortgage interest deductions for investment properties purchased before 27 March 2021 will be phased out between 1 October 2021 and 31 March 2025. 

1. Property development and new builds will be exempt from the interest limitation rules. In addition, new builds will be subject to a 5-year bright-line test rather than a 10-year test. 

1. Non-residential properties, such as commercial or industrial properties, will not be subject to the new rules.

(1) Land outside New Zealand;

(2) Employee accommodation;

(3) Farmland;

(4) Care facilities such as hospitals, nursing homes, convalescent homes and shelters;

(5) Commercial accommodation, such as hotels, motels and boarding houses;

(6) Retirement apartments, nursing homes and similar facilities; 

(7) Main homes.

Mortgage interest on an owner-occupied home is generally not deductible for personal income tax purposes. The exemption here, however, refers to homes used to earn income, such as when an owner rents out part of their home or uses it commercially through Airbnb. Previously, a corresponding proportion of mortgage interest could be deducted as an expense for tax purposes, and this will remain unaffected.

 

#02 In chapters 7、8 of the consultation document, we can see more detailed provisions on what qualifies as a new build.

These mainly include: 

1.  A new dwelling added to vacant land; 

1.  A new dwelling added to existing residential land, whether on a separate title or a subsidiary title; 

1.  A new dwelling or multiple dwellings built to replace an existing home;

1.  An existing home renovated and converted into two or more dwellings;

1.  Dwellings converted from commercial buildings.

These 5 categories of property will be classified as new builds and will continue to qualify for residential investment property interest deductions and a five-year bright-line test period.

 

#03 Residential investment properties held by companies:

To prevent investors from transferring properties into companies to avoid the interest deduction rules, the Government proposes applying the rules to companies where residential properties make up more than 50% of their assets. So, if commercial property accounts for more than 50% of a company's assets and residential investment property accounts for less than 50%, would the interest still be tax-deductible? These questions await input from all of us.

The consultation document also raises many complex questions. Implementation details open for consultation include whether investors should be able to deduct past interest expenses when selling a property and pay tax according to the bright-line test period.

 

The Chinese Building Industry Association invites you to have your say——

Public feedback sought on the implementation of new property tax rules!

The public can make submissions on the document before 12 July. The Chinese Building Industry Association calls on industry professionals to take part in the consultation on the new tax rules and make the Chinese community's voice in the building industry heard.