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Changes to property tax 2022 Video information

Audio and visual transcript 

Slide 1 

Changes to GST, FBT and KiwiSaver 2022

For Tax Intermediaries 

March 2022 

The information in this presentation is current as at 1 March 2022 


Slide 2 

Purpose 

Changes to property tax 2022

For: 

  • Tax Intermediaries 

Topics 

  • Bright-line
  • Interest deductibility

Notes 

Changes are coming to help address the supply and demand for residential properties.

From 1 April 2022, there will be changes to the bright-line property rule and the introduction of new interest limitation rules.

These changes have been proposed by the Government and are expected to be passed by 31 March 2022.

Today we’re going to be going over the changes for bright-line and interest deductibility – which we refer to as the interest limitation rules.

The information in this presentation is current as at 1 March 2022.


Slide 3 

Title: Bright-line 

Notes 

First up let’s take a look at the bright-line changes.


Slide 4 

Title: 10-year bright-line rule 

Bright-line property rule has been extended to 10 years.

Applies to properties purchased on or after 27 March 2021.

Residential properties may be subject to income tax on any profit made, if sold within 10 years.

Notes 

The bright-line property rule has been extended to 10 years for properties purchased on or after 27 March 2021.

This means residential properties may be subject to income tax on any profit made on the sale of the property if sold within 10 years of being acquired.


Slide 5 

Title: 5-year bright-line rules

A shorter bright-line period of 5 years is expected to be introduced for new builds.

Applies for the initial owners.

New builds purchased off the plans and new builds constructed on land already owned will also qualify for the 5 year bright-line period.

Notes 

A shorter bright-line period of 5 years is expected to be introduced for new builds.

This means if someone purchases a new build property, a bright-line period of 5 years will apply – as opposed to the recently enacted 10 year bright-line period I just spoke about. 

The 5-year bright-line period applies for the initial owners who have acquired the completed new build within 12 months after the Code Compliance Certificate (CCC) is issued under the Building Act 2004.

New builds purchased off plans and new builds constructed on land already owned will also qualify for the 5 year bright-line period, provided these new builds receive their CCCs by the time the land is disposed of.


Slide 6 

Title: Main home exclusion

There are changes to the main home exclusion where a main home and rental property are on the same land:

  • If the main home is >50% of the land, it will be excluded from the bright-line property rule
  • If the main home is <50% of the land, any gain on sale will be apportioned between the main home (untaxed) and the rental property (taxed)

Notes 

There are changes to the way bright-line applies to the main home when there is another dwelling for investment purposes on the same land as the main home.

Where the main home is over 50% of the land, the existing main home exclusion continues to apply in the same way. 

If the main home is under 50% of the land, any gain made on the sale of the property is apportioned between the main home and the rental property. The main home portion will not be taxed. 

When a property is not used as the main home for periods of more than 12 consecutive months, the time apportionment rule applies regardless of whether the main home takes up more or less than half the land. This rule ensures that tax is paid on those periods of non-main home use.

To find out whether a property is likely to be taxable under any of the property rules, you can use the property tax decision tool on myIR – this will be updated once the legislation has passed. 


Slide 7

Title: Making bright-line easier

Bright-line residential property sale information - IR833 form will be pre-populated with property information. 

A new bright-line guide is in development and is expected to be published in April 2022.

Notes

We’re working to make it easier for customers to meet their bright-line obligations.

Everyone filing in myIR and intermediaries filing in Gateway will now be able to complete the bright-line residential property sale information - IR833 form with their return.

This form will show in the return if we think the customer has a bright-line sale or if you indicate this when filing.

The IR833 form will come pre-populated with property information including title number, address, date of purchase and date of sale.

A new bright-line guide is in development and is expected to be published in April 2022.


Slide 8

Title: Making bright-line easier

The image shows where you can indicate whether it is a bright-line sale in myIR.

Notes

And soon, there will be the ability to respond to bright-line correspondence through myIR.

We will continue to notify you when we believe a client has a sale that meets the bright-line rule, and the bright-line letter will redirect to tax agents where appropriate. 

On receiving this letter you or your client can let us know in myIR if the sale doesn’t fall within the bright-line rule, and we will update our records. 


Slide 9

Title: Making bright-line easier

The image shows how the property sales table will show in myIR

Notes

You will be able to see a table of property sales in myIR for the sales we notify you about and if you advise us that it’s a main home, for example, we won’t pre-populate that property information into that financial years income tax return.  Alternatively, you can continue to advise us with end of year filing by removing the pre-populated IR833 record.


Slide 10

Title: Interest deductibility

Notes

Now let’s take a look at the changes to interest deductibility.


Slide 11

Title: Limiting interest deductibility

Ability to claim interest on loans for residential property as an expense is being phased out.

For residential property acquired on or after 27 March 2021, interest will be denied as an expense from 1 October 2021, unless an exclusion or exemption applies.

For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025.

Notes

The ability to claim interest on loans for residential property as an expense is being phased out.

These new interest limitation rules are expected to be passed into law by 31 March 2022 and will be backdated to apply from 1 October 2021, as outlined by the Government in March 2021.

For residential property acquired on or after 27 March 2021, interest will be denied as an expense from 1 October 2021, unless an exclusion or exemption applies.

For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025.


Slide 12

Title: Phasing out interest deductions

The image shows a table which shows the income year and the amount of interest you can claim:

1 April 2020 - 31 March 2021 100%

1 April 2021 - 30 September 2021 100%

1 October 2021 - 31 March 2022 75%

1 April 2022 - 31 March 2023 75%

1 April 2023 - 31 March 2024 50%

1 April 2024 - 31 March 2025 25%

1 April 2025 onwards 0%

Notes

This table shows how the phasing will work:

As you can see interest is fully deductible until 30 September 2021,

Then from 1 October 2021 to 31 March 2023 only 75% of interest is deductible, and so on

And then finally from 1 April 2025, no interest will be deductible.


Slide 13

Title: Limiting interest deductibility

Interest on new loans drawn down on or after 27 March 2021 will not be deductible.

Special rules will apply for:

  • Refinanced loans
  • Interest on revolving credit
  • Overdraft facilities

Any interest on borrowings above the closing balance on 26 March 2021 will not be deductible.

If the property is taxable when sold, the previously denied interest may be added to the cost of the property to reduce the taxable gain.

Notes

Interest on any new loans drawn down on or after 27 March 2021 will not be deductible.

Special rules will also apply for refinanced loans and for interest on revolving credit and overdraft facilities. Any interest on borrowings above the closing balance on 26 March 2021 will not be deductible.

If you sell or dispose of a residential property and the sale is taxable under the bright-line property rule, you’ll be able to add the amount of the interest previously denied to the cost of the property to reduce the taxable gain. If this results in a loss, the loss must be ring-fenced and can’t be used to offset income from other sources like salaries and wages. 


Slide 14

Title: Exemptions and exclusions

The proposed new interest limitation rules will apply to properties that are suitable to be used for long-term residential accommodation.

Some types of residential accommodation will be excluded from the rules. 

These are generally properties unsuitable for use as long-term accommodation or for first home buyers. For example:

  • Main home (when it is used to earn income)
  • Farmland
  • Business premises

Notes

The proposed new interest limitation rules will apply to properties that are suitable to be used for long-term residential accommodation.

As such, some types of residential accommodation will be excluded from the interest limitation rules - the legislation lists and defines these properties.

The list includes:

  • The main home

  • Business premises

  • Farmland

  • Certain Māori land, Papakāinga and Kaumātua housing

  • Emergency, transitional, social & council housing

  • Commercial accommodation (hotels, motels etc.)

  • Care facilities, rest homes and retirement villages

  • Employee accommodation

  • Student accommodation

This is because these types of properties are generally unsuitable for use as long-term accommodation or for first home buyers.

Interest can be claimed for loans where the property is used for emergency, transitional or social housing when leased to the Government or to a registered community housing provider.

There are also three other exclusions from the interest limitation rules – these are land businesses, residential developments, and new builds – we’ll look at these in more detail now.


Slide 15

Title: Land business exemption

Applies for interest relating to land held as part of a business which develops, subdivides, or deals in land, or which erects buildings on land.

Interest relating to remediation work and other expenses from the ownership and development of the land will also qualify if this exemption applies.

Notes

Let’s start by looking at the land business exemption first

A land business exemption applies for interest relating to land held as part of a business which develops, subdivides, or deals in land, or which erects buildings on land.

Interest relating to remediation work and other expenses from ownership and development of the land will also qualify if this exemption applies.

Now let’s take a look at the development exemption.


Slide 16

Title: Development exemption

You may qualify for the development exemption if you undertake a one-off development for the purpose of creating a new build.

Exemption starts when your development commences and ends when the dwellings Code Compliance Certificate (CCC) is issued. 

If the exemption applies, interest is only deductible if a deduction is allowed by general tax rules.

Remediation work that is not significant enough to create a new build will not qualify for this exemption.

Notes

If you carry on a one-off development and you develop, subdivide, or build on land for the purpose of creating a new build, then you may qualify for the development exemption.

The development exemption starts when your development/subdivision/building scheme or undertaking commences (uses existing tax law). It ends when the dwelling’s Code Compliance Certificate (CCC) is issued, and then you transition to the new build exemption.

Even if the exemption applies, interest is only deductible if a deduction is allowed by general tax rules.

Interest relating to remediation work done to an existing property that is not significant enough to create a new build will not qualify for this exemption.


Slide 17

Title: New build exemption

A new build is a self-contained residence that is added to land, with a CCC issued on or after 27 March 2020.

Includes the following self-contained dwellings:

  • added to residential land
  • converted from single into multiple dwellings
  • converted from a commercial premises or a hotel/motel
  • previously on the earthquake prone buildings register that have been remediated
  • at least 75% reclad because of weathertightness issues

Exemption applies for 20 years from the date of the CCC.

Notes

That brings us to our final exemption – the new build exemption. The exemption will apply to the initial owners and any subsequent owners for 20 years from the date of the CCC.

A new build is a self-contained residence that is added to land, with a CCC issued on or after 27 March 2020.

This will include:

  • Dwellings added to residential land

  • Existing dwellings that are converted into multiple dwellings

  • Dwellings converted from a commercial premises or a hotel/motel

  • Dwellings previously on the earthquake prone buildings register that have been remediated

  • Dwellings that have been at least 75% reclad because of weathertightness issues


Slide 18

Title: New return fields

There will be new fields in the 2022 income tax return to capture information about interest expenses in relation to residential property:

  • Total interest on residential property
  • Interest expense claimed
  • Reason for interest expense claimed

Notes

To help capture information about interest expenses in relation to residential property, there will be new fields included in all relevant 2022 income tax returns.

These fields will be

  • Total interest on residential property – this is the total amount of interest you incurred in relation to your residential property

  • Interest expense claimed – this is the amount of interest expense you have claimed this year, under the new rules

  • Reason for interest expense claimed – if you have claimed interest expense this year, you must provide a reason as to why you are eligible for the deduction.

For some people, there may be more than one reason.

We’ve added these fields to our paper returns, in myIR and we’ve worked with software providers to update the income tax return service.

If there is more than one residential property, the information you enter in the income tax return will be the aggregated amounts, i.e. you will declare the total amount and tick all of the applicable reasons.

The same fields will also be included in the IR3R “Rental Income”. This is where you could provide the property-by-property detail.


Slide 19

Title: Residential income definition

The definition of ‘residential income’ will include income that a person derives from a foreign currency loan to finance residential rental property.

Notes

One further change that relates to property is the change to the definition of residential income

From 1 April 2022, the definition of ‘residential income’ will include income that a person derives from a foreign currency loan to finance residential rental property.

This is to fix the problem where foreign exchange loss is included as residential rental deductions whereas foreign exchange gain is not able to be used to offset against the loss. 


Slide 20

Title: Educating customers

Inland Revenue is investing in a range of marketing and education campaigns to help customers understand and prepare for these changes.

An awareness campaign is running throughout March. More focused marketing is planned from mid-May to early July.

Notes

Inland Revenue is investing in a range of marketing and education campaigns to help customers understand and prepare for the interest deductibility changes.

To help raise awareness of the proposed rental property interest limitation rules, marketing communications are running throughout March. These will involve paid advertising (online media and outdoor), plus targeted emails and letters sent direct to customers who have included rental income in recent tax returns. Where a customer has a redirect to a tax agent, they will be excluded from the direct marketing communications. A second phase is planned to run from mid-May to early July and this will focus more on the information and tools available.

We’re also updating the relevant guides with information on the new rules, developing calculators to help calculate how much interest can be claimed and creating new web content.


Slide 21

Title: Thank you

To view our other webinars visit www.ird.govt.nz/2022-changes

If you have any questions about our webinar, please email [email protected]

Notes

That brings us to the end of our presentation on the upcoming property changes.

More information about the upcoming property changes can be found at www.ird.govt.nz/property.

To view our other webinars, visit www.ird.govt.nz/2022-changes

If you have any questions about our webinars, please send them to [email protected]

Thank you for you for joining us, ngā mihi

Last updated: 13 Mar 2022
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