Government declines request for 'build-to-rent' developments to be exempt from the interest deduction tax change, but continues to consider ways to support the sector

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.

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