In a previous edition of our Tax News NZ, we discussed Inland Revenue’s draft statement on land holding costs. The statement has now been finalised. This article highlights key insights that make the statement worth a read.

Section DA 1 (the “general permission”) allows expenses to be deducted only when there is a nexus with income, or with a business carried on for the purpose of deriving income. Appropriately, this provision forms the basis for the explanations in the statement.

The first thing to note about the final statement is the Commissioner has clarified that holding costs may include repairs and maintenance, provided they are otherwise deductible. The Commissioner has previously released a statement on when repairs and maintenance will be deductible. However, holding costs do not include capital improvements or expenses that relate only to the use of the land. 

Another point of note is that the Commissioner has slightly amended his view on interest deductibility. The final statement explains the rationale behind this adjustment.  

Interest incurred to purchase land may be deductible depending on the use of the land. Land may be physically used – such as a rental property, or for development. It may also be “used” without being physically used – such as when it is held for resale. Both of these uses are taxable uses, and the interest may be deducted. When the land is held for both a taxable and non-taxable purpose, the interest should be apportioned.  

The Commissioner states that:

“Where land is held on capital account (that is, not held for taxable sale) and there is both income-earning use and private use of the property…a time-based or time-and space-based apportionment between the current year income-earning and private uses of the property is generally appropriate.”

In other words, it is not sufficient that there is a taxable use, if there is also non-taxable and/or private use. In addition, it is not sufficient that there may be an eventual tax liability on sale.  Neither of these will make interest fully deductible.

The Commissioner goes on to say that interest is deductible only when there is a current year income earning or anticipated income earning use of land, for example, the property is rented out or available to be rented out. In that case, the general permission will be satisfied. For interest, once the general permission is satisfied, you will need to consider whether other regimes may apply to restrict the deduction such as the mixed-use asset rules, interest limitation rules and loss ring-fencing.  

The statement includes a helpful diagram on page nine to visualize this process.

All in all, the final statement accomplishes the commendable task of demystifying an incredibly complex area.