Mortgage cashbacks? What does Inland Revenue say?

By Kirsty Hallett and Simone Walker

Who doesn’t like receiving a cash incentive from their bank? Whether used to cover legal fees, moving costs or simply as an extra cash receipt, these payments, commonly referred to as cashback payments, are increasingly common in home-lending arrangements with banks. 

Many taxpayers may assume that these payments are either immediately taxable or completely irrelevant for tax purposes.  However, Inland Revenue’s latest draft guidance confirms that the tax implications may not be as simple as many borrowers expect.

Inland Revenue has released, as an exposure draft, a ‘Questions We’ve Been Asked’, clarifying the income tax treatment of cash incentive payments.  The draft guidance explains when a cash incentive payment will be taxable and confirms the timing of when the amount should be recognised as income. Importantly, the draft guidance is only applicable for taxpayers that are ‘cash basis persons’.

In most cases, a borrower who receives a cash incentive when taking out a mortgage to buy their own home is unlikely to have to pay tax on the cash incentive payment received.  However, where the borrowing relates wholly or partly to earn income (such as a rental property, business use, or home office) the cash incentive can affect the borrower’s final tax position when the loan is repaid, refinanced, or otherwise ends.

What does Inland Revenue say?

The draft guidance confirms that a bank cash incentive payment does not have the characteristics of ordinary income.  Specifically, Inland Revenue’s view is that the cash incentive payment:

• Is not interest
• Is not part of a regular income-earning process
• Is not received from an income-producing activity
• More generally does not have the characteristics expected of ordinary income

Therefore, a cash incentive payment is not assessable income when it is received.

However, because the cash incentive payment is received when a taxpayer enters into a loan, the payment is a financial arrangement.  Accordingly, the cash incentive payment must be included in a base price adjustment (BPA) calculation when the loan matures, is refinanced, or is otherwise repaid.

A reminder:  the financial arrangement rules matter for individuals too

While homeowners may not consider  the financial arrangement regime, most New Zealand dollar mortgage arrangements will be financial arrangements and therefore these rules will technically apply to the borrower.

The financial arrangement rules typically require taxpayers to spread their income and expenditure over the term of the arrangement.  Luckily, most individual borrowers have smaller and less complex financial arrangements and will be ‘cash basis persons’ which allows for some concessional treatment.

The cash basis person eligibility must be tested each year by meeting one of the following criteria:

1. The total of the absolute values of a person’s income and expenditure under all their financial arrangements in the relevant income year is $200,000 or less.
2. The total of the absolute values of all the person’s financial arrangements is $2 million or less on every day in the income year.

Cash basis persons recognise income when money is received and expenditure, such as loan interest, when it is paid. When the loan is repaid, a cash basis person must undertake a final wash-up calculation (a base price adjustment or BPA) to ensure all income and gains (including capital receipts) arising under the arrangement have been recognised as income, after allowing for any expenditure or losses that have arisen under the arrangement.  It ensures that the overall economic outcome of the arrangement is correctly reflected for tax purposes. 

In the BPA the cash incentive payment is treated as ‘consideration’ and in essence will offset or reduce the interest deduction available in the final year of the loan.  If the cash incentive payment exceeds the interest deduction available in the final year of the loan then the BPA will be positive and the respective amount will need to be included as taxable income in the taxpayer’s return.

This means that while there is no tax consequence when the cash incentive payment is received, the amount is not ignored forever. 

Private home loans: largely a non-event

Cash incentive payments received on purely private home loans are unlikely to have any tax consequences. 

Where a loan is solely private, interest is not deductible. Although a BPA is still technically required when the loan ends, the private limitation will generally prevent any interest deduction. If total interest paid exceeds the cash incentive, there should usually be no income or expenditure to recognise for tax purposes. 

Practically, this means the rules can largely be ignored for loans that are purely personal in nature. For many homeowners, this means they can continue to regard the cash incentive payment as a welcome bonus, without needing to worry about income tax consequences.

Loan used solely for an income-earning purpose

The position is different where the loan funds are used to derive income, for example to acquire a rental property.

Here the cash incentive payment is recognised as consideration under the financial arrangement; however the timing of the recognition is deferred until the final year of the loan in the BPA. In a simple case, this will reduce the interest deduction available in the final year.  If the cash incentive payment exceeds the deductible interest available in the final year, the excess may need to be returned as taxable income.

During the 2022–2025 income years, residential interest limitation rules denied some borrowers deductions for interest on residential investment property loans. Where a person was denied a deduction for interest under these rules, adjustments will likely be needed to a positive BPA result to adjust the outcome for the amount of the interest deduction that was denied.

Loan used for more than one purpose:  The more complex area

Where a borrower uses a loan for both an income-earning and a private purpose the tax treatment will be more nuanced, especially where a property’s use moves between private and income-producing during the term of the loan.

Examples of such situations include:

• A homeowner uses part of their home as a home office
• A former rental property becomes the owner’s personal home
• A homeowner’s personal home is later rented out
• Mixed-use properties

The BPA will become more complex, but the underlying principles will remain the same.  In the final year of the loan, the cash incentive payment should be included as income in the BPA.  However, a positive BPA will need to be adjusted by reference to the extent to which deductions have been allowed or denied during the term of the loan to determine whether the outcome of the BPA needs to be recognised as income. 

The practical result will depend on the extent to which the loan has been used to derive income, and the extent to which interest deductions have been allowed or denied over the term of the loan.

Deloitte Comment

The draft guidance is a reminder that the financial arrangement rules are complex and far-reaching. 

Any borrowers receiving cash incentive payments should keep track of the amount received as part of the loan records so that it can be factored in, if and when a BPA calculation is required.  Taxpayers who have a tax agent should also make sure their advisor is aware they received a cash incentive payment on entering the loan. 

While it may be tempting to simply ignore the tax consequences when a loan is obtained for a purely private use, even a small change in circumstances, such as using a dedicated part of the property as a home office, can result in a BPA adjustment being required in the final year of the loan. 

Submissions on the draft guidance close on 3 September 2026.  If you have any questions about cash incentive payments or financial arrangements please contact your usual Deloitte advisor.