The Government has released the draft legislation outlining the details of the policy limiting the deductibility of interest costs on residential property investments.

Finance Minister Grant Robertson says the interest limitation proposals, announced in March, aim to stem investor demand for existing residential properties. They do not affect the main family home or new builds.

'Earlier this year we extended the bright-line test from five years to 10 to help reduce the incentive to invest in housing over other types of assets.”

Early indications suggest that enthusiasm for existing residential investment properties might be waning.

'The detailed proposals we are releasing today will further level the playing field for existing homes in favour of first home buyers,” says Robertson.

'Tax is neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government's overall response.”

Revenue Minister David Parker says the proposals, including the way the new build exemption would be applied, had been subject to public consultation.

The proposals would limit the availability of deductions for interest expenses incurred by residential property investors from October 1.

'As we made clear when we announced the policy in March, for existing residential investment property acquired on or after March 27, 2021, deductions for the cost of interest will no longer be allowed.

'Interest deductions on borrowings drawn down before March 27, 2021, for existing residential property acquired before this date would be phased out over the period between October 1 and March 31, 2025,” he says.

'We want to curb investors' appetite for existing residential properties but also want to stimulate investment in new housing. That's why we're also proposing an exemption for property development and for new builds, allowing interest deductions in full.”

'The Government is committed to boosting the supply of new housing. The exemptions for new builds and for property development will ensure the interest limitation rules do not reduce the ongoing supply of new housing,” says Housing Minister Megan Woods.

A property that received its code compliance certificate on or after March 27, 2020, will be eligible to deduct interest for up to 20 years from the time the property's code compliance certificate is issued.

The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20 year period.

Megan Woods says the new build exemption also applied to purpose-built rentals.

'Purpose-built rentals are large residential developments designed for ongoing rental, rather than sale. This is an emerging area and one where we see real potential to meet gaps in our rental market. I am expecting further advice on purpose-built rentals in coming weeks and will report back to Cabinet on whether there should be an extension beyond the 20 year period for some or all of this sector,” Megan Woods says.

David Parker says that generally speaking, private residential investment properties capable of being used for long-term accommodation would be subject to the rules.

'So hotels for instance, would not be affected by these rules as they are set up to provide short-term, and not long-term accommodation. The owner-occupier of a house with flatmates would not be affected either,” he says.

To help people understand the interest limitation proposals, a set of information sheets are available at taxpolicy.ird.govt.nz.

The changes would be set out in a Supplementary Order Paper that will be considered by the Finance and Expenditure select committee for inclusion in the current taxation bill.

He says that the Supplementary Order Paper also contained two other proposals.

These are to provide employers with another option for calculating fringe benefit tax, and to clarify the application of the business continuity test for carrying losses forward.