Generally, it is proposed residential property be considered a new build if it is a self-contained dwelling with its own kitchen and bathroom, and has received a code compliance certificate (CCC).

If the discussion document is adopted, the new build exemptions will include new houses on vacant land, houses that replace existing dwellings, adding a new second house to an existing property, commercial property converted to housing and renovating a house to create two or more homes.

Where a dwelling is added to land, it does not need to be a new building, nor constructed on-site, to be a new build. This means modular and relocated homes can qualify.

Significantly, renovating a previously uninhabitable dwelling so that it becomes habitable increases housing supply, so these properties could theoretically be considered new builds.

However, the IRD says it appears difficult to implement this in a practical manner. Feedback is sought on whether there is a way such renovations could be included in the definition of a new build in an uncomplicated way.

The proposal document suggests conversions of office blocks to apartments will be exempt and it also queries whether heritage buildings being substantially altered should count as new builds. 

People who buy a new build within 12 months of the CCC being issued will be eligible for the exemption as would owners of existing property who put a new home onto their land.

The Government wants to know whether people who buy new builds a year after the CCC has been issued, but within a certain period such as 10 or 20 years, should also be exempted.

It is considering whether subsequent owners should also be exempt from the interest changes, and for how long any exemption might last.

However, the Government wants to capture companies whose assets are more than 50% residential property and close companies, those owned by a small number of people.

The IRD says for companies with many different types of assets and sources of funds, allocating interest cost to individual properties is difficult and costly.

Such companies are unlikely to be adding to house price pressures, and their loans will usually be used to acquire other business assets instead of residential property.

But taxpayers using loans to acquire residential property will be subject to the new tax rules and they are:

• trusts
• partnerships and limited partnerships
• close companies (where five or fewer people own more than 50% of the company), including look‐through companies
• any company where residential property makes up more than 50% of its assets (the Government seeks feedback on how to define these companies)
• individuals (everyone else buying investment property).

The changes will also apply to any taxpayer borrowing money to invest in an entity where residential property makes up a significant part of the entity’s assets.

Because Kāinga Ora provides social housing it will be excluded from the interest deductibility as will social housing providers if they are charities or otherwise tax exempt.

Outside the tax

Family homes and non-residential properties are not caught up in the new tax rules. Residential property held outside New Zealand, property development, employee accommodation, farmland, rest homes, motels, retirement villages, charities and care facilities are also outside their scope.

Student accommodation, serviced apartments and Māori land could also be exempted.

By exempting new builds from the tax and the extension of the bright-line test, the Government says it will encourage construction of more new houses, dampen demand from investors for existing properties and open up the market to first home buyers.

Revenue Minister David Parker says the exemptions for new builds should help boost supply by channelling investment towards increasing housing stock. It should also stop direct competition between first home buyers and investors for existing housing stock.

“The Government’s goal is to encourage more sustainable house prices, by dampening investor demand for existing housing stock to improve affordability for first-home buyers.”

The consultation closes on July 12 and all new measures will apply from October.