Interest Limitation on Residential Land & Brightline Test

Before the introduction of the interest limitation rules the largest proportion of deductions for residential property investors was the interest component. However, the Government has decided that residential property investors have an advantage over other occupiers because they can deduct their interest. This conveniently overlooks the fact that the deductions are being made against rental income. However, not content to ring fence residential rental losses they now want to tax investors on income they have not derived by phasing out interest deductions on all residential property apart from new builds. It should be noted that the National Party are promising to reverse this non-deductibility rule.

Whilst every investor’s circumstances are different, not all investors will be impacted the same way by these rules. In fact, some, depending on their investment appetite may make these rules work to their own advantage.

NEW BUILT PROPERTIES (NEW BUILDS)

New Builds qualify for a 20-year exemption from the interest limitation rules and are only subject to a 5-year Brightline Period. The good news is that the exemption is attached to the property itself as opposed to the owner. Consequently, initial and subsequent owners of a New Build will continue to enjoy the 20-year exemption from the interest limitation.

What is a New Build?

A new Build is a property that had a Code of Compliance Certificate (CCC) issued on or after 27 March 2020 and acquired within 12 months of receiving a CCC. Consequently, an existing property can also come within the New Build definition in certain circumstances, for example:

NEW DWELLING OR CONVERSION OF AN EXISTING DWELLING. If you relocate a dwelling or construct a dwelling on existing land, and CCC is issued on or after 27 March 2020, this will be a New Build for which the interest limitation will not apply. This would also include a conversion of an existing sleepout which does not have a bathroom & kitchen to a self- contained unit with a bathroom and kitchen. In order to satisfy the New Build criteria, the requirement is that the property must be self-contained. Adding a bathroom and a kitchenette would satisfy this requirement.
RELOCATION OF EXISTING DWELLING ON THE SAME BLOCK OF LAND. Relocating a self-contained unit from one part of the land to another part of the same land. In order for this to qualify as New Build there has to be a valid reason for the relocation, for example the relocation was required in order to create space to erect another dwelling or a minor dwelling on the land.
MULTI TENANCY CONVERSIONS. A conversion of one dwelling into two residences will give rise to both dwellings qualifying as a New Build as a new CCC will be issued for both.
REMEDIAL WORKS EXISTING RESIDENCE. A land with an existing residence will qualify as a new build where a significant amount of remedial works have been undertaken:
Building requires earthquake strengthening and was listed on Earthquake Prone Register, or
Where there are weather tightness issues that resulted in at least 75% reclad.

July 2022