The Government has declined a request by property investors and lawyers for “build-to-rent” (BTR) developments to be exempt from a new rule that’ll require some investors to pay more tax.
However, it’s continuing to look at how it may be able to support the BTR sector.
The Government, in March 2021, decided to remove the ability for interest on debt secured against residential investment property to be written off as an expense for tax purposes.
While the rule started being phased in straight away, its details are still being ironed out ahead of legislation enacting the change being passed.
The aim of the rule is to make residential property less attractive to investors, while helping level the playing field between investors and owner-occupiers, who can’t write off interest on their mortgages as an expense against their wages/salaries.
But because the Government didn’t want the rule to prevent new houses from being built, it created “development” and “new build” exemptions.
These mean a developer will be able to continue deducting interest from the time they start developing their land until they sell the land or receive a Code Compliance Certificate for their new build.
Then, under the “new build” exemption, they will be able to keep deducting interest for 20 years from the time the certificate is issued. Any new owners of the property will likewise be able to keep deducting interest until the 20-year mark from the Code Compliance Certificate being issued is hit.
Inland Revenue worries about policy being undermined
Property investors and lawyers, including Kiwi Property Group Limited, New Ground Capital, Property Council New Zealand, and Russell McVeagh, suggested properties specifically built to be rented out be exempt from the rules altogether.
This would require BTR property being defined as its own asset class within the law, distinct from other long-term investment property.
However, Parliament’s Finance and Expenditure Committee declined the request on the back of advice from Inland Revenue.
Inland Revenue opposed extending the new build exemption beyond 20 years for BTRs, and opposed exempting existing BTRs, arguing this would risk “undermining the overall policy objective” of the rule.
Terry Baucher, a tax accountant at Baucher Consulting, supported Inland Revenue’s position, fearing too many exemptions simply create opportunities for the rules to be worked around and avoided.
There are already a number of exemptions, including for the “main home”, emergency, transitional, social, and council housing, care facilities, employee accommodation, retirement villages/rest homes, student accommodation, farmland, commercial accommodation, and certain types of Māori land.
The bill enacting the rule, the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill, is soon due to have its third and final reading in Parliament.
Govt considering separate special rules for BTR
Inland Revenue, in its advice, also said, “The Government is considering whether special rules for BTRs should be introduced and, if so, how these rules should be designed.
“Further information on whether the Government intends to introduce special rules for BTRs, and how those rules might be designed, will become available in 2022.”
Housing Minister Megan Woods elaborated on this, saying: “Exploration of an exemption for BTR developments is one piece of wider advice the Government is getting, on what can be done to stimulate the building of more long-term affordable rental properties.
"There is a clear need for more new rental accommodation, and we are focussed on initiatives that will bring on developments that are affordable, with long-term renting options, so people have security of tenure.”
Property Council CEO Leonie Freeman said, “We encourage the government to act sooner rather than later to avoid missing out on substantial investment in housing from the private sector, which will make a real difference to New Zealand renters who deserve a better deal.
“The ball remains firmly in the government’s court but the decision is now binary; create an asset class and deliver more homes, or do nothing and miss out on the fastest growing large-scale residential asset class in the world.”
Property Council’s suggested definitions for BTR
Market BTR (requiring no government assistance)
- an asset specifically designed, constructed or adapted for long-term residential tenancies;
- accommodation comprised of a portfolio of minimum 50 self-contained dwellings and include some form of shared amenity;
- developments held in unified ownership, and where individual dwellings are separately let or available for let as one or more residential tenancies (of any duration) during a period of at least eight years from the date of issue of the Code Compliance Certificate;
- professional and qualified management, with oversight under a single entity.
Affordable BTR (requiring government assistance)
- an asset specifically designed, constructed or adapted for long-term residential tenancies, and may include some form of shared amenity;
- accommodation typically comprised of at least 20 self-contained dwellings in a single building or a concentration of at least 20 dwellings in single or multiple unit buildings;
- dwellings let separately but held in unified ownership;
- professional and qualified management, with oversight under a single entity;
- dwellings typically let at an “affordable rent” being a rental price (on an annualised basis) equal to no more than 30% of the most recently reported relevant Territorial Authority’s median gross household income.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
49 Comments
The aim of the rule is to make residential property less attractive to investors, while helping level the playing field between investors and owner-occupiers, who can’t write off interest on their mortgages as an expense against their wages/salaries.
Any home owner, or aspiring home owner, should watch carefully what their preferred party does to support - or not - attempts to correct this rort favouring ppty investors over home owners.
Build to Rent is only commercially viable in NZ with unaffordable levels of rent ($550 / week at least) and / or decent capital gains on the property that can be leveraged (and we know where that ends).
The problem we have is that our land, housing build, and development / infrastructure costs make the commercial development of affordable rent properties basically impossible. Govt subsidy is required - the choice is where to put it:
- upfront in land / infrastructure / build costs on the condition that the homes must be let at affordable rents by not-for-profits (UK housing association model)?
- direct rent top-up to the tenant so that they can afford their rent (current model)?
Needless to say I think we need to pivot quickly to the upfront subsidy model to avoid hedgefund-backed commercial developers making a killing by exploiting our high rents, expensive land, low tax, weak ass housing regulations, and apparent willingness to splash accommodation supplement around. If you want to see where this ends up - look at the absolute disaster unfolding in Ireland.
Can someone explain to me why the interest deductibility legislation hasn't even been passed in law...? Will Labour back track on this aswell?
https://taxpolicy.ird.govt.nz/topical-issues/interest-deductions
Hopefully Luxon will come in and reverse such laws, if passed ? Interest deductions are the life blood of property investment by mum and dad investors. By removing it, the field is now open only to large investors who will change the city shape to apartments in all suburbs. Which will be ugly, to say the least.
BTRs at outlying areas may need support as renters will require incentive by way of low rents to move there.
These things are not that black and white. There will be many unintended consequences.
There will be unintended consequences. But, the intended consequences of encouraging investment into something productive rather than buying used houses and acting to reign in crazy property prices, are likely worth the risk.
Similar regulations have been in place in the UK for a couple of years now - have there been significant unintended consequences there?
In the UK the deductibility of interest expenses is only limited where the deduction is greater than 2 million pounds. It is vastly different. They also have no tax on the first 11,000 of rental income and drastically reduced tax on the next 43,000 pounds of rental income.
Could you share your source - I have no idea where you got the 2 million threshold from as this isn't in the tax guidance and this is the first time I've heard of it, despite owning rental property in the UK.
The 11k limit (actually 12.57k now) is the regular tax free allowance, and not ring fenced to rental income i.e. if you also have a regular job, your rental income will be above this threshold. The 43k (actually 50.27k now) limit is the basic tax rate of 20%, above this is 40%. This simply changes how much tax you will pay on the profit that is no longer removed by deducting interest payments.
There's some examples of how this works here - using the same outdated thresholds you used. This is very similar to how things will work here.
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landl…
Smokey, interest deductions are allowed as a deduction against any other form of taxable income, so I guess the question is why just residential property that is being rented? The left is about the equal sharing of misery. Heaven forbid that some people do better than others.
When the Government announced the change in March 2021, it wanted it to take effect straight away. Waiting would've opened a window for people to rush into the market, pumping it up even further, ahead of the change taking effect. So the Government pretty much said, 'These are the rules at a high level. We will work through the details via the regular legislative process, which takes a while.' I expect the bill to be passed before the end of the month.
The process has created uncertainty for property investors, but the Government was trying to slow the market down, so I guess it wasn't concerned about this. A key message it wanted to deliver from the start, to ensure houses kept being built, was that new builds would be exempt. Labour won't backtrack on this, but National wants the rule gone.
For some obscure reason we want to encourage building more houses as long as its to be handed to homeowners rather than renters. Why are we assuming we all want to end up as home owners. What's wrong in choosing to rent if that is what i want to do as far as providing a roof over my head goes and if thats what makes financial sense to me. This policy, by the sounds of it, will restrict my choice of available rentable properties and will likely push rental prices up. Come in Luxon. Cant wait until next year to have some sanity in this simple but made up into overly complex/stupidity. The other issue is mom and pops are furiously discouraged into investment housing in favor of corporates. Why? Whats the issue with moms and pops building houses for renting? They probably stand out a bit when they want to do a bit of hard labour in the weekends to end up building a retirement nest egg for themselves by owning rentals and along the way helps to create jobs at local hardware stores and lumber mills. Come on Luxon, cant wait to have this all sorted.
All the usual go-to talking points rolled out, including the "won't somebody think of the renters????" in addition to "won't somebody think of the mom and pop investors???" ....the group who seems to lack for any care is the poor old working folk who are left paying all the taxes to fund society...
It's high time that property investors paid their fair share rather than working folk having to pay all the taxes in society while also funding welfare subsidies for property prices and rents.
... no ... a rental is effectively a SME for accounting & taxation purposes ... as such , interest payments ought to be a legitimate taxation expense ... as they are for every other business in NZ ...
These Labour muppets haven't a clue about what theyre doing , why , and what are the potential consequences ....
If they are an SME they should have to register a business, be employed by the business, and pay wages and taxes as both a business and an individual. I don't think any business should be incorporated into an individuals income. Thats how you keep a financial system fair.
Of course you can kwbrn, if you are deriving taxable income from your shares, and the journals have a nexus to deriving that income. But of course, you will have to pay capital gains on your share trading as well. Bet you don't want to do that huh? So don't be selective when you make comments.
Another waste of time in that to say these are BTRs is just a redefinition of the true meaning to make the same old same old, more clickbaity.
Just like we have done with the word 'affordable' which by any other developed countries definition would be high unaffordable.
There is very little that makes these a real BTR.
Not being satisfied with the greatest wealth transfer in NZ’s history, around 1 trillion dollars to the already wealthy the government is now looking at how it can provide exemptions for BTR. Say what ? Tax the crap out of ordinary New Zealand investors and set up a scheme to advantage rich multinational companies build huge blocks of shoe boxes for the poor to rent. I would love to see Megan woods living in one with her washing hanging out the window , listening to heavy metal to the smell of herbs in the hallway.
"The aim of the rule is to make residential property less attractive to investors, while helping level the playing field between investors and owner-occupiers, who can’t write off interest on their mortgages as an expense against their wages/salaries".
Anyone who put this together should have "I am stupid" tattooed on their forehead. Level the playing field? The reason investors get a deduction for interest expenses is because they are making INCOME (in the form of rents) from the property, and the tax act specifically gives the ability to deduct expenses incurred in the derivation of taxable income. Doh!
Private landlords will never be able to provide long term, affordable housing for anybody.
The sooner the ghastly culture of landlording for every man and his dog to aspire to is put to bed, the better.
The state needs to be building masses of affordable housing, decent housing not ghetto like structures, which will cost mightily at first, but eventually will pay off, and in more ways than just economic.
The way we presently do things is just plain unsustainable, contributes to the breakdown of society by denying far too many some sort of stake in the ground, and is setting inequality in stone.
On offer a bit higher up the chain, should be leasehold properties, preferably owned by co-operatives that even tenants can, if they choose, take out shares in.
The leases would look more like those in Germany, or perhaps commercial ones here, and be transferable.
There's still be spaces for people to rent properties on a shorter term basis, as there will still be people for whom that is desirable, they will however, eventually be the minority of rented properties.
“Private landlords will never be able to provide long term, affordable housing for anybody “
Well yes they could and did until the smorgasbord of stupid regulations appeared. Non tax deductibility of interest springing to mind as the standout. It’s the kind of idea that you would expect from someone who is about to fail school economics and doesn’t understand how cashflow works.
You are responding to someone who wants every lever pulled to rid this country of the whole idea that residential property investment should actually even be a thing. To me, it is economic cannibalism, little short of 'people farming', as tenants are about as trapped as any farm animal. You can change supermarket/gas station/takeaway joint as and when you choose, there is no such choice in renting a house, there's no such thing as being able to change landlords this week as the one across the road has their house on special this week. Trying to claim it is the same as any other business is a nonsense, commercial interest rates are not charged and you have a captive clientele, then you skive off with untaxed capital gains at the end of it all, after 10 years, name me one other business that offers so many safety nets.
Personally I think it is an immoral investment, and has played a pretty large part in the breakdown of society. The sooner it is gone, the better and replaced with a system of state and co-operative ownership the better.
There would still remain the ability to rent houses short term it's just it will be a tiny market.
Bring it on
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.