The Government’s announcement on Friday that it will now allow some landlords an exemption to the new interest-deductibility rules is welcome news for the build-to-rent (BTR) sector.
Having stopped landlords from deducting the interest paid on rental properties from their tax bills earlier this year, some are calling this a U-turn; others a refinement of policy to help shift New Zealand towards more sophisticated rental stock and security of rental tenure.
The exemption applies to owners of new and existing build-to-rent developments, and applies to a development for 20 years. To qualify (among other requirements):
- an owner will need to offer tenants a 10-year tenancy with a 56-day notice period – though there is no requirement that the tenant must take up the 10-year lease;
- the developments must also contain at least 20 dwellings (in one or more buildings, which can include mixed use buildings).
The 20-dwelling threshold has been criticised by those who are offering longer-term leases in smaller builds, but indicates an intention to drive the domestic BTR sector to provide larger-scale developments typical of BTR overseas and create a more definite BTR asset class.
The exemption will apply retrospectively from 1 October 2021.
The Government has been clear that the exemption is aimed at the BTR sector, which focuses on high-quality rentals built at pace and scale. Pace and scale do not seem to have influenced the Government’s response to the BTR’s sector’s calls for change – the guidance issued by the Overseas Investment Office last April (see our Alert here) has been the only policy response to the sector this term. There remain some major hurdles for the sector, including continued uncertainty about the liquidity of a BTR asset when it comes to overseas investors, ill-fitting tenancy laws, and a GST treatment that still favours build-to-sell developments. We look forward to seeing whether the Government will make further changes to unlock the full potential of BTR.
The full announcement from Housing Minister Megan Woods on the interest-deductibility exemption can be found here.
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