New Build-to-rent exemption from interest limitation rules

The Government has announced a new exemption from the interest limitation rules for large scale Build-to-Rent land, with the draft legislation being included in the omnibus tax bill released on 30 August 2022.

Build-to-rent properties provide long-term rental accommodation and are generally developed and professionally managed by institutional investors, developers or community housing providers.

Unlike the existing New Build Land exemption which lasts for 20 years, qualifying Build-to-Rent land will be exempt from the interest limitation rules in perpetuity.

Owners of Build-to-Rent land will be able to deduct interest for as long as they hold the property and continue to operate it as a Build-to-Rent dwelling. Any subsequent owner can also deduct interest for as long as they operate the property as a Build-to-Rent dwelling.

Taxpayers who own existing Build-to-Rent land, or are able to meet the Build-to-Rent criteria by 1 July 2023, will be able to deduct interest from 1 October 2021, and this will continue in perpetuity while they continue to satisfy the exemption requirements. The exemption will be retrospective which means those taxpayers who have already filed their 2022 income tax return without an interest deduction will be able to amend their return.

To qualify for the Build-to-Rent exemption, the following must be satisfied:

• Tenants must be offered a fixed-term tenancy of at least 10 years with the ability to give 56 days notice of termination, but they may agree to or request other tenancy offers. A tenant does not have to accept a 10-year tenancy offer, rather a Build-to-Rent dwelling will satisfy this requirement as long as a 10-year tenancy term is offered.
• The Build-to-Rent development must comprise a single development of at least 20 dwellings, in one or more buildings on either a single title of land or multiple adjoining titles.
• The development can include other dwellings or commercial premises that do not form part of the Build-to-Rent land (eg, an apartment building with shops underneath).
• The dwellings can be held in one or more titles but the dwellings and any common land or facilities must have a single owner.
• The Build-to-Rent dwellings must be used or available for rent under the Residential Tenancies Act 1986, and explicit personalisation policies must be offered over and above the Residential Tenancies Act 1986 (eg, tenants allowed to have pets or repaint the property in their preferred colours).

As usual, the devil is in the detail. It is however interesting to note that a Build-to-Rent exemption was considered and dismissed at the time the interest limitation rules were introduced last year, on the advice of Inland Revenue, who argued that exempting Build-to-Rent land would risk “undermining the overall policy objective” of the interest limitation rules.

It remains to be seen whether the new exemption, which effectively reintroduces the old status quo of interest deductibility, as opposed to any real incentive to encourage such development, will actually encourage further Build-to-Rent developments in New Zealand, particularly in the light of other ongoing headwinds such as construction material and labour shortages, spiralling prices and the current declining tenant demand due to increased numbers migrating away from New Zealand.

Please contact your Nexia advisor if you would like to discuss the new exemption, or the interest limitation rules in general, or you can get in touch via our general contact details here.