Schedule 15 exclusions
Certain properties listed in Schedule 15 of the Income Tax Act 2007 are unaffected by the interest limitation rules. This means that if you satisfy the other requirements for claiming deductions, you are still able to deduct interest for these properties:
- Main home – the interest limitation rules do not apply to interest related to any income-earning use of an owner-occupier’s main home, such as flatmates, boarders, bed and breakfast where the owner lives on the property
- Properties used as business premises (except for an accommodation business), like offices and shops. This includes residential properties to the extent they are used as business premises (for example, a house converted into a doctor’s surgery).
- Certain Māori land, papakāinga and kaumātua housing, and land transferred as part of a settlement under Te Tiriti o Waitangi/Treaty of Waitangi
- Commercial accommodation such as hotels, motels, and hostels (but not short-stay accommodation provided in a residential dwelling)
- Boarding establishment
- Care facilities: hospitals, nursing homes, hospices, and convalescent homes
- Retirement villages and rest homes
- Employee accommodation
- Student accommodation
- Build-to-rent land.
You generally can’t claim interest deductions for private use, but if you use your main home to earn income (such as from a flatmate or boarder), you are able to deduct some interest against that income.
For interest to be deductible, it must satisfy the general deductibility rules.
In a flatmate situation, apportion expenses between:
- shared areas
- areas exclusively used by the flatmate
- areas exclusively used by the homeowner.
This means the following:
- Māori customary land, Māori freehold land, Crown land reserved for Māori, and land set aside as a Māori reservation.
- Housing on land owned directly or indirectly by a Māori authority (or an entity which is eligible to be a Māori authority) that is provided as a residence to its shareholders or beneficiaries (for example, papakāinga or kaumātua housing).
- Land owned directly or indirectly by a Māori authority (or entity eligible to be one) under a te Tiriti o Waitangi/Treaty of Waitangi settlement or a post-Treaty settlement mechanism (for example, through a right of first refusal). This includes where land is transferred to an entity owned by the claimant, or where a ground lease is held by an entity owned by the claimant.
A boarding establishment is a property with:
- a minimum of 10 boarding rooms that are not self-contained
- communal living facilities, including shared kitchens and living areas available to all residents
- servicing and management taken care of by the business.
Employee accommodation is property a person provides to their employees or other workers for accommodation in connection with their employment or service. It also includes property provided by a company in the same wholly-owned group as the person to the person’s employees or other workers. However, it does not include accommodation provided to employees or other workers who are associated with the person, unless it is necessary for the person to provide the accommodation because of the nature or remoteness of their business.
This means the following:
- a boarding establishment used for the accommodation of students enrolled at a registered school or premises described in section 5B of the Residential Tenancies Act 1986, and
- premises described in section 5B of the Residential Tenancies Act 1986 even if they are used mainly, and not exclusively, for the accommodation of students.
This does not include a landlord who leases their residential rental property to students privately.
Your development must be approved as build-to-rent land by Te Tūāpapa Kura Kāinga ‒ Ministry of Housing and Urban Development (HUD).
To qualify, build-to-rent land must meet all these requirements.
- There are 20 or more dwellings in a single development on a single block or adjacent blocks, held in one or more titles.
- Owned by the same person (a person includes a legal entity like a company).
- Each dwelling must be being prepared for use, available, or occupied under a residential tenancy.
- Every residential tenancy must have the option of a 10-year term, with the ability for the tenant to give 56 days’ notice of termination.
- Every tenancy agreement includes a personalisation policy.
Where to apply for the exclusion
If your development meets the requirements, you can apply for a build-to-rent exclusion on the HUD website.
Once approved, HUD will record your land on a register of build-to-rent assets and will share this information with us. You will need to notify HUD of any changes to your approved build-to-rent land, for example units or dwellings that no longer meet the requirements.
When your exclusion comes to an end
Individual units or dwellings that become ineligible can never qualify for the exclusion again in the future. If this results in your development no longer meeting the requirements for build-to-rent land, the development will no longer qualify for an exclusion from the interest limitation rules.
Even if your development meets the requirements in the future, it can never qualify for the exclusion again.
Once your exclusion comes to an end, you must stop claiming interest as an expense in your income tax return unless another exclusion or exemption applies.
Emergency, transitional and social housing
You can still claim interest deductions if your property’s sole purpose is for emergency, transitional, social and council housing and is leased to one of the following:
- government department (for example, the Ministry of Housing and Urban Development or Kāinga Ora)
- registered community housing provider or a council-controlled organisation.
This also covers connected or related services provided in the same building or in a different building on the same land. The whole property needs to be leased to the housing provider to qualify, (for example, 1 bedroom in a 5-bedroom house would not qualify for this exemption).
A full list of eligible government departments can be found in schedule 2, part 1 of the Public Service Act 2020
The Community Housing Regulatory Authority maintains a register of community housing providers registered under the Public and Community Housing Management Act 1992:
Property is not subject to the interest limitation rules if it is used by a local authority or a council-controlled organisation (CCO) for the sole purpose of providing housing to people assessed by a local authority as being eligible for housing at less than market rent.
This still applies if connected or wraparound services are provided on site either in the same building or in a different building on the same land (for example, rehabilitation). The whole property needs to be leased to the local authority or CCO in order to qualify (for example, 1-bedroom in a 5-bedroom house would not qualify for this exemption).
Interest incurred on a property is subject to interest limitation if it is not used for council housing, for example, if the CCO provides rental housing at market rates.
What if part of my property is affected and part is excluded?
If you own a piece of land that has both a residential property and excluded property on the same legal title such as a 2-storey building with a shop on the ground floor and a flat on the top floor, you can deduct interest for the portion of the property that is excluded. You’ll need to apportion your interest expenses between the different parts of the land using the standard tax apportionment principles.
Example: Tāmati owns a 2-storey building with dual purpose
Tāmati owns a 2-storey building with mixed residential and commercial use. The ground floor is a clothing store and the upper storey is rented out as long-term residential accommodation. The whole building is on a single legal title.
Tāmati has 1 loan for the whole property. The upper-storey apartment is a residential property, but the clothing store on the ground floor is excluded. Following standard principles for apportionment, Tāmati calculates that the clothing store on the ground floor accounts for 55%, and the upper storey for 45%, of the interest paid on his loan.
So, Tāmati would be subject to interest limitation for 45% of his interest expense, as this would be interest that relates to affected property. For the period from 1 October 2021 to 31 March 2025, a portion of the 45% would not be deductible.
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