Date posted: 09/11/2022

Is the build-to-rent exemption from interest limitation rules feasible?

CA ANZ does not support the proposal to provide an in-perpetuity exemption from the interest limitation rules for build-to-rent dwellings.

In brief

  • Taking a look at the proposed interest limitation rules for build-to-rent dwellings.
  • An inequitable proposal
  • The requirement that the build-to-rent land be “contiguous land” should be reconsidered

CA ANZ does not support the proposal to provide an in-perpetuity exemption from the interest limitation rules for build-to-rent dwellings and highlights that the proposal is inequitable, creating an uneven playing field between large and small investors.

CA ANZ acknowledges that the build to rent concept is new to New Zealand and the industry is in its infancy. There are differing views as to whether:

  • the current interest limitation rules with the 20-year new build concession will prevent the industry from scaling up and disincentivise overseas investors;
  • the proposal will result in affordable and quality rentals;
  • the proposal will help fill the significant gaps in New Zealand’s rental market.

The requirement that the build-to-rent land be “contiguous land” should be reconsidered because where land is held in separate titles, the requirement may be problematic if the development includes commercial premises or other dwellings that do not meet the build-to-rent requirements.

The requirement that land would have to continually meet the requirements of the “build-to-rent” land definition to qualify for the exemption is “extremely onerous.” CA ANZ recommend that a taxpayer be allowed a period of time (e.g., six months) to rectify a breach before being disqualified. Such a rule could be based on the PIE rules, where a temporary breach of the eligibility criteria may not result in the cessation of the PIE, provided the breach is corrected within a set timeframe. The rule could include a de minimis. That is, the consequence of any non-compliance should be proportionate to the breach as well as the opportunity to fix the breach.

Disqualification for a minor breach is inappropriate, especially as the build-to-rent classification attaches to the land and will impact subsequent purchasers. Disqualification will also give rise to practical implications. A breach may not become known until well down the track after an audit has taken place. Ensuring the land continually meets the definition will require additional due diligence, add complexity to the sale process and reduce certainty.

Regarding changes in co-ownership of residential land, CA ANZ supports these proposals to clarify which bright-line test applies to shares in land that a person acquires at different times.

In the situation where a person acquires shares in a property over a period of time, we agreed that the relevant bright-line period should be that which applied at the time the first interest was acquired. This solution is practical and will mean that an owner of land who acquires several interests over time need only apply one bright-line test – and therefore only one set of application criteria, including the main home exemption.

CA ANZ also agrees with the proposed change to amend references to changes in co-ownership resulting in land being “acquired” to instead refer to the ownership (form of tenancy) being “converted”. This amendment will help clarify a very complex area as it is more usual for an interest in land to be “converted” from a joint tenancy to a tenancy in common, rather than “acquired”.

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