There are couple of hot topics within our business/investors community in the past week in relation to the recent
government announcement for, one, the proposed interest limitation rule over residential property investments and, two, the headline of /dàshè/ or the “amnesty”, which is the latest immigration policy update of “One-off residence visa pathway”. Let’s look at these a bit closely and see if we can find some common grounds.
The interest limitation rule
The Government has released the draft legislation outlining the details of the policy limiting the deductibility of interest costs on residential property investments. Finance Minister Grant Robertson said the interest limitation proposals, announced in March, aim to stem investor demand for existing residential properties. They do not affect the main family home or new builds. The proposals are designed to put off the enthusiasm for existing residential investment properties and aim to further level the playing field for existing homes in favour of first home buyers.
But exactly how the proposal might be able to achieve, let’s outline them below:
- The proposals would limit the availability of deductions of interest expenses incurred by residential property investors from 1 October 2021
- For existing residential investment property acquired on or after 27 March 2021 deductions for the cost of interest will no longer be allowed
- Interest deductions on borrowings drawn down before 27 March 2021 for existing residential property acquired before this date would be phased out over the period between 1 October 2021 and 31 March 2025
- However the exemptions will apply to “New Builds”, that are the properties that received its code compliance certificate on or after 27 March 2020 will be eligible to deduct interest for up to 20 years from the time the property’s code compliance certificate is issued. The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20 year period.
The “One-off residence visa pathway” or the “amnesty”?
Hardly an amnesty at all, as it normally refers to an official pardon for people who have been convicted of political offences. Applicants would not be considered eligible if there are any convictions committed,but we understand why the term is used andfeel the level of anticipation from the community, and we sincerely congratulate those who might be eligible and have waited so long for this moment.
On 30 September 2021, the Government announced a new one-off residence visa pathway for some temporary work visa holders currently in New Zealand. Some critical purpose visa holders arriving in New Zealand between 30 September 2021 and 31 July 2022 on long-term visas may also be eligible for this new visa. Partners and dependents can be included as part of these residence applications.
Although list of eligibility may not appear to be straightforward for applicants, the government has announced that the policy may bring as many as 165,000 people into the inclusion.
Our observation
In the media statement jointly released by the Minsters from Finance, Housing and Revenue on the 28 September 2021, “tax is neither the cause nor the solution to the housing problem, but it does have an influence.” So what influence the government is ultimately trying to achieve?
Regardless how much of interest the investors are allowed to deducted, the potential impacts the policy may have on other types of properties, such as owners occupied, hotels and retirement villages, Minister of Housing Megan Woods mentioned a key word which may worth to ponder, “the new build exemption also applied to Purpose-built rentals”
So what are Purpose-built rentals? You may already have your own definition, although PBR is relatively new to New Zealand market, it has been existed in overseas since as early as the 1990’s, especially the US and Canada, they are purpose built residential rental property, developed at scale, professionally managed and offering long-term tenure that seeks in many ways to mirror home ownership. Because long-term tenure is offered by a long-term owner/investor, it is typically backed by investment capital that is equally long-term in its focus (institutionalised investments?).
If the new “interest limitation rule” as described by Finance Minister Grant Robertson as “level the playing field for existing homes in favour of first home buyers”, which enables the part of the current renters become home owners, how we going to cater the other renters and especially house the newly accepted residents of 165,000?This will be a significant portion of the 600,000 units of existing rental market.
As what Woods added “This is an emerging area and one where we see real potential to meet gaps in our rental market.I am expecting further advice on purpose-built rentals in coming weeks and will report back to Cabinet on whether there should be an extension beyond the 20 year period for some or all of this sector”.
We see on one hand, a real potential of an increase in population regardless how it’s going to unfold in the next couple of years, on the other, a policy giving significant tax subsidy to a newly emerged sector which could potentially accommodate the increase and beyond. We will leave this to you to ponder at your leisure time. But one thing is for sure, the builders will be kept busy.
Please feel free to get in touch with us if you wish to discuss further especially with any implications on your business and investments.
We hope you and family stay safe and keep business fit.
Your faithful team at HCCA Chartered Accountants
