Interest rules for big build to rent developments small on detail

The residential property tax rules have had their latest remodel with the amendments in the Taxation (Annual Rates for 2022—23, Platform Economy, and Remedial Matters) Bill (No 2) receiving Royal assent on 31 March 2023.

These recent amendments were largely taxpayer-friendly improvements to the residential property rules (as discussed in our September Tax Alert Article here), including:

• Bright-line rollover relief improvements
• Broader rollover relief for the interest limitation rules
• Clarification of the rules when there is co-ownership of land
• Build-to-rent exclusion from the interest limitation rules

The build-to-rent interest limitation exclusion is a new feature in the Income Tax Act 2007 and attracted a lot of attention in the submission process with general support being provided for the new rules. However, the devil is in the detail, or lack of detail, with these rules. What is known is:

• Residential property developments that qualify as a build-to-rent development will be completely excluded from the interest limitation rules (compared with the 20-year exemption for new build properties). This will apply from 1 October 2021 when the interest limitation rules took effect.
• The rules are intended to apply to new and existing developments that meet the requirements for the exclusion.
• There must be a minimum of 20 build-to-rent dwellings in a single development, although these can be across multiple titles. Commercial or non-build-to-rent dwellings may also be included in the same development.
• Submissions to reduce the number of dwellings required were declined on the basis that the benefit was intended to encourage the development of new housing supply at scale and that smaller investors could still benefit from the 20-year new build exemption.
• The definition of build-to-rent land has been updated so that land does not have to be contiguous land that is directly touching. This is to allow for developments that may span several blocks or where there is a road between dwellings. The definition now refers to a single project of 20 or more dwellings.
• The feedback on the submissions has clarified that the requirement for build-to-rent land to be owned by the same person will still allow limited partnerships and joint ventures to use these rules.
• Each of the minimum of 20 build-to-rent dwellings must be used, available for use, or being prepared for a residential tenancy, where the landlord or manager offers tenants a fixed-term tenancy of at least 10-years, tenants may terminate the tenancy with 56 days’ notice and the tenancy agreement refers to the ability of the tenant to personalise the dwelling with the consent of the landlord.
• Submissions opposing the 10-year tenancy requirements were declined by Officials and the Finance and Expenditure Committee on the basis that this is a requirement of the Government in return for the exclusion from the interest limitation rules.
• The personalisation policy intends to make lifestyle issues like pets and home-making more transparent to tenants. The definition of build-to-rent land has been clarified to reflect this requirement and this is expected to be further clarified in guidance to be issued on these rules.
• Agreements with tenants must still be in accordance with the Residential Tenancies Act 1986.
• A development must continuously meet the requirements of the definition of “build-to-rent land” summarised above to qualify for the exemption. Existing developments have until 1 July 2023 to meet the definition requirements which would apply retrospectively, allowing any interest deductions denied from 1 October 2021 to be claimed.
• Those wanting to qualify for the exemption would need sign-off from the Chief Executive of Te Tāūpapa Kura Kāinga – Ministry of Housing and Urban Development. The legislation has been clarified to refer to the Chief Executive of the department responsible for the administration of the Residential Tenancies Act 1986 to provide for any changes in the department name or form.
• This certification process is still being developed and further guidance is to be provided. Other than clarifying how taxpayers should apply, it is hoped that this guidance will also address the following issues raised by submitters:
  • that there be an annual certification process to provide certainty for potential purchasers or financiers that land continues to meet the definition,
  • that there is an ability to rectify an inadvertent breach of the build-to-rent requirements within a certain timeframe,
  • that the certification applies to the property rather than the taxpayer so it passes to a new owner, provided the build-to-rent terms are still satisfied.

The legislation for the build-to-rent exclusion is limited and taxpayers will be relying on the guidance to be issued to clarify the process to be certified and how the rules will apply in practice. While the exclusion sounds good in principle, it is another layer of tax rules in the residential property space and it is questionable if the policy intent to increase the housing supply is being helped by the increased complexity in the tax system.

If you have any questions around residential property and how the tax rules may apply to you, please contact your usual Deloitte advisor.