The Government has chosen to delay the phasing out of the interest limitation rule for residential property investors, as outlined in the coalition agreement between National and Act parties. Instead of implementing the phase-out in the current tax year, it will now commence in the year ending March 31, 2025. This rule restricts investors from deducting mortgage interest as an expense for tax purposes, with exceptions for new builds.
The existing law, introduced during a period of property market overheating by the former Labour Government, disallows interest deductions for properties purchased after March 27, 2021. For properties acquired before this date, a 50% interest deduction is permitted in the current tax year, ending this month.
The initial agreement between National and Act aimed to allow a 60% interest deduction in the current tax year, which would have had retrospective implications and potentially led to tax refunds for some investors. However, due to revenue implications and economic challenges, the Government has opted to maintain the current rules for this tax year, with plans to increase the deduction to 80% in the year ending March 2025 and allow full interest deduction by March 2026.
Act leader and Associate Finance Minister David Seymour chose not to emphasise his defeat against National, instead highlighting the convenience of avoiding a retroactive alteration. He refrained from discussing any potential concessions from National in exchange for his departure from the coalition agreement, opting to concentrate on the benefits for investors and renters.
“Landlords have been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis. These costs are inevitably passed on to tenants, one of the reasons New Zealand has all-time high rental costs,” Seymour said.
“Removing the ability for landlords to claim interest expenses made residential properties less attractive and reduced the pool of properties for tenants to choose from.”
When the interest limitation rule was implemented by Labour, one of the arguments they presented was that it aimed to equalise the treatment of investors with owner-occupiers, who are unable to deduct mortgage interest as expenses for tax reduction. Investors countered by asserting that interest expenses are typically deductible in business, thus the exclusion of this deduction for a specific investment type introduced inconsistency in the tax framework.
Despite this, Labour's finance spokeswoman Barbara Edmonds criticised the Government for neglecting first-home buyers who are facing challenges in progressing financially. She expressed concerns that the repercussions of this decision would be enduring and impact future generations. “Landlords will become tax cut millionaires, once again showing the coalition Government’s priorities are a disgrace.”
Edmonds said the decision showed the priorities were “not lunches in schools, the smokefree generation or continuing the Cook Strait ferries” but “it’s mega landlords”.
“The assertion that this will bring the cost of rent down is a wolf in sheep’s clothing, there is nothing in today’s announcement that guarantees tenants will have savings passed on to them as a result,” Edmonds said.
The amendment to the interest limitation rule will be included in the Taxation (Annual Rates for 2023–24, Multinational Tax and Remedial Matters) Bill, presently under review by a select committee and scheduled for approval by the end of the month.
Act had advocated for the complete removal of the interest limitation rule in a single action during their pre-election campaign, as opposed to a gradual phase-out. Additionally, Act proposed the elimination of the bright-line test (effectively a capital gains tax on investment property), which is set to decrease from 10 to two years starting from July 1, 2024.
“To overcome New Zealand’s many challenges there needs to be an environment where investment and development is encouraged. This [interest limitation rule] change is a step in the right direction,” Seymour said.
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