The Government has released a document further outlining changes that are proposed following the property announcements back in March. This new document has information regarding interest limitation rules and brightline test rules. It’s close to 150 pages long, and is very detailed so below is an outline of some of the key points, and a few of our key takeaways.

Interest limitations:

The document outlines suggesting rules around tracing when the loan is acquired and if it’s intended to be used for a number of things, and this will aid in deciphering whether or not interest is/isn’t subjected to the new limitations.

  • It’s predominantly focused on the intended purpose of the loan, so loans only used for rental properties that are non-residential won’t be impacted.
  • If your company’s asset make up is over 50% residential land, then the tracing rule will apply.
  • Property held through entities (such as a company, trusts etc) will follow a “transposed entity” rule.

Applicable property types:

The interest limit applies to investors who are seeking to purchase a property intended to be rented out, but there are a few exceptions:

  • Residential property purchased outside of New Zealand
  • Medical/care operations such as Hospitals, Hospice etc.
  • Housing for employees
  • Retirement Villages
  • Land used for Farming
  • Situations where owner is earning income on his main home (flatting)
  • Hotels, Motels, etc

The document also mentioned potential exclusions may also include Student housing, Maori Land, and Serviced Apartments (feedback is requested)

What is actually proposed to be classified as a new build?

  • A building added to empty land
  • A property is converted from commercial use into residential use
  • A new house being built to replace a house already on that section
  • An addition of a new dwelling to a property (this includes both attached and stand-alone)
  • Renovation that create 2 or more houses/units/dwellings

According to the proposed changes, early owners (within a year of the Code Compliance Certificate (CCC) being assigned) of new builds that meet the above criteria would be exempt from the new interest limitation rules. The document is also soliciting feedback about how future owners should be affected by the interest limitation rules. This involves how long should the first/early owner be exempt (eg. first 20 years of ownership or entire length of ownership).

Our Thoughts:

While there is still a lot up in the air regarding the proposed rules this gives people a bit more certainty around what the proposed changes could mean for investors. A major concern is that these rules may still be worked through when the legislation comes into effect on 1 October.

These rules may have a major impact on the development space putting an even greater stretch on already limited land and resources to get these projects off the ground.