The interest limitation rules apply to:
- Individuals
- Look-through companies
- Partnerships
- Trusts
- Close companies
- Certain non-close companies (see below for criteria)
Close companies
If your company is a close company where 5 or fewer individuals or trustees own more than 50% of the company, you will usually have to apply the rules, unless it is an exempt Māori company.
Exempt Māori company
Interest limitation rules do not apply to an exempt Māori company, even if it is a close company. An exempt Māori company is a company that is not a residential land company or residential land wholly-owned group member and is one of the following:
- a Māori authority or eligible to be a Māori authority, or
- wholly-owned by a Māori authority or by a company or trust that is eligible to be a Māori authority.
Certain non-close companies
The interest limitation rules apply to certain non-close companies. If your company is not a close company, the interest limitation rules only apply if your company is a residential land company or a residential land wholly-owned group member.
Residential land company or residential land wholly-owned group member
A company will be a ‘residential land company’ for an income year if is not a member of a wholly-owned group and the value of its residential property that comes under interest limitation rules is equal to or is greater than 50% of the value of its total assets at any time during that income year. If the company owns shares in a company that is a residential land company, the value of those shares is treated as residential property for the purpose of the 50% threshold calculation.
If your company is part of a wholly-owned group, this 50% test is applied on a consolidated basis at the group level. This means, if your company exceeds the 50% threshold on its own, the interest limitation rules will not apply if it is part of a wholly-owned group and the group is below the 50% threshold.
There is a residential land company example at the bottom of the page.
Interposed entity rules
Interest deductions are denied for a person who indirectly holds residential rental property through an interposed residential property holder (IRP holder). This does not apply to look-through companies or to partnerships.
Who is an IRP holder
An IRP holder for a person may be 1 of 3 types of residential property holders:
- a close company for which the person has voting interests or market value interests and the company has, at the end of each quarter in the income year, a residential property percentage of more than 10%
- a company that is not a close company for which the person has voting interests or market value interests and the company has, at any time during the income year, a residential property percentage of more than 50%
- trustees of a trust of which the person is a direct or indirect beneficiary, and the relevant trust has, at any time during the income year, a residential property percentage of more than 10%.
The residential property percentage is the value of the entity’s residential rental property as a percentage of the value of the entity’s total assets. For this calculation, residential rental property excludes:
- property covered by the land business, development and new build exemptions
- property used for social, emergency, transitional and council housing.
Talk to a tax agent if you think the IRP entity rules may apply to you.
Company A assets consist of the following:
· Residential property with a value of $400,000
· Other business property with a value of $500,000
· 50% of the shares in B Ltd with a value of $300,000.
To determine if Company A is a residential land company, it must first determine if Company B is a residential land company. This is because shares (owned by non-close companies) in residential land companies are treated like residential property for the purposes of this test.
The percentage of Company B residential property of its total assets is 66.7% (being $400,000/$600,000). Company B is therefore a residential land company.
Company A must therefore treat the value of its shares in Company B ($300,000) as residential property in applying the residential land company test itself.
The value of Company A’s residential property as a percentage of its total assets is therefore 58.3% (($400,000 + $300,000)/$1,200,000). Company A is therefore also a residential land company.