Subpart DH—Interest incurred in relation to certain land
DH 1 Interest related to certain land
The purpose of this subpart is to deny a person a deduction for certain interest, despite any other provision in this Part. The provisions of this subpart override the general permission.
Defined in this Act: amount, deduction, general permission, interest
DH 2 When this subpart applies
This subpart applies to interest incurred on or after 1 October 2021.
Defined in this Act: interest
DH 3 When this subpart applies: companies
This subpart applies to a company, if—
(a)
the company is a close company, and it is not an exempt Māori company:
(b)
the company is not a close company, and—
(i)
it is a residential land company; and
(ii)
it is not a member of a wholly-owned group:
(c)
the company is not a close company, and it is a residential land wholly-owned group member.
Defined in this Act: company, close company, exempt Māori company, residential land company, residential land wholly-owned group member, wholly-owned group
DH 4 When this subpart does not apply: exemptions for new builds, development, social or emergency or transitional housing, and council housing
Exemption: new builds
(1)
This subpart does not apply to interest incurred by a person to the extent to which it is—
(a)
incurred in relation to new build land; and
(b)
incurred before the date that is 20 years after the earliest of the following dates for the new build land:
(i)
the date on which the code compliance certificate described in section DH 5(5) is issued:
(ii)
the date that, in the records of a local authority or building consent authority, the relevant conversion is recorded as having been “completed”
, in the case provided in section DH 5(5)(d):
(iii)
the date that the relevant building work is entered into the records of a local authority or building consent authority as “substantially completed”
, in the case of a code compliance certificate described in section DH 5(5) being issued subject to a building consent waiver or modification under clause B2.3.1 of the Building Code under the Building Act 2004.
Exemption: business relating to land under section CB 7
(2)
This subpart does not apply to interest incurred by a person to the extent to which it is in incurred in relation to land that the person holds as part of a business described in section CB 7 (Disposal: land acquired for purposes of business relating to land).
Exemption: development, division, or building
(3)
This subpart does not apply to interest incurred by a person to the extent to which it is incurred in relation to land (the land) that is subject to the person’s undertaking or scheme involving development, division, or building for the purpose of creating new build land. However, the exemption in this subsection ceases, if and to the extent to which—
(a)
the land becomes new build land under section DH 5(7):
Exemption: social, emergency, or transitional housing
(4)
This subpart does not apply to interest incurred by a person to the extent to which the interest is incurred in relation to land that is a dwelling while the dwelling—
(a)
is used by a person referred to in paragraph (b) (the social housing provider) for the sole purpose of providing 1 or more of—
(i)
social housing as defined in section 2 of the Public and Community Housing Management Act 1992:
(ii)
temporary accommodation for people in need while they seek, or are assisted in finding, more permanent accommodation; and
(b)
is owned or rented by a social housing provider, who is 1 or more of—
(i)
a registered community housing provider under the Public and Community Housing Management Act 1992:
(ii)
Kāinga Ora–Homes and Communities or a wholly-owned subsidiary of Kāinga Ora–Homes and Communities:
(iii)
a department listed in schedule 2, part 1 of the Public Service Act 2020.
Exemption: council housing
(5)
This subpart does not apply to interest incurred by a council-controlled organisation, as defined in section 6 of the Local Government Act 2002, to the extent to which the interest is incurred in relation to land that is a dwelling while the dwelling is owned by the council-controlled organisation and used by the council-controlled organisation or a local authority for the sole purpose of providing housing for people assessed by a local authority as being eligible for accommodation at less than market rental.
Exemption: Kāinga Ora-Homes and Communities and wholly-owned subsidiaries
(6)
This subpart does not apply to Kāinga Ora–Homes and Communities and its wholly-owned subsidiaries.
Defined in this Act: code compliance certificate, dwelling, interest, land, local authority, new build land
DH 5 Key terms
Code compliance certificate
(1)
Code compliance certificate means a code compliance certificate issued under the Building Act 2004.
Disallowed residential property
(2)
Disallowed residential property—
(a)
means land in New Zealand to the extent to which—
(i)
it has a place configured as a residence or abode, whether or not it is used as a place of residence or abode, including any appurtenances belonging to or enjoyed with the place:
(ii)
the owner has an arrangement that relates to erecting a place there, configured as a residence or abode, whether or not that place is or is to be used as a place of residence or abode, including any appurtenances belonging to or enjoyed with the place:
(iii)
it is bare land that, under rules in the relevant operative district plan, may be used for erecting a place there, configured as a residence or abode, whether or not that place is or is to be used as a place of residence or abode, including any appurtenances belonging to or enjoyed with the place:
(b)
does not include land to the extent to which it is excepted residential land.
Excepted residential land
(3)
Excepted residential land means land to the extent to which it is described in schedule 15.
Exempt Māori company
(4)
Exempt Māori company means—
(a)
a company that is a Maori authority or eligible to be a Maori authority, if,—
(i)
in the case that the company is not a member of a wholly-owned group, it is not a residential land company:
(ii)
in the case that the company is a member of a wholly-owned group, it is not a residential land wholly-owned group member:
(b)
a company that is wholly-owned by a Maori authority or wholly-owned by a company or trust that is eligible to be a Maori authority, if—
(i)
the wholly-owned company is not a residential land wholly-owned group member:
(ii)
in the case that the company is wholly-owned by a trust, the wholly-owned company is not a residential land company.
Grandparented transitional loans
(5)
Grandparented transitional loan means loan amounts, ignoring re-drawings or additional borrowings under the same loan facility on or after 27 March 2021, if the relevant loan facilities were denominated in New Zealand dollars and were—
(a)
first drawn down upon before 27 March 2021 for disallowed residential property:
(b)
first drawn down upon on or after 27 March 2021 for acquiring disallowed residential property, if the person acquired an estate or interest in the property before 27 March 2021:
(c)
first drawn down upon on or after 27 March 2021 for acquiring disallowed residential property, if the acquisition of the property resulted from an offer that is—
(i)
made on or before 23 March 2021; and
(ii)
irrevocable before 27 March 2021.
Interposed residential property holder
(6)
Interposed residential property holder means, for a person,—
(a)
a close company for which the person has voting interests or market value interests and the company has, at the end of a quarter in the income year, a residential property percentage of more than 10%:
(b)
a company that is not a close company for which the person has voting interests or market value interests, and the company has, at any time in the income year, a residential property percentage of more than 50%:
(c)
the trustees of a trust of which the person is a direct or indirect beneficiary, if the relevant trust has, at any time in the income year, a residential property percentage of more than 10%.
New build land
(7)
New build land—
(a)
means land to the extent to which it has a place that is configured as a self-contained residence or abode, if a code compliance certificate has been issued on or after 27 March 2020 evidencing that the place was added to the land; and
(b)
includes, for land described in paragraph (a), land exclusively used by residents of the place and also a reasonable proportion of shared areas of land, appurtenant to the place; and
(c)
includes land for which there is an agreement that a place that is configured as a self-contained residence or abode will be added to the land and a code compliance certificate will be issued on or after 27 March 2020 evidencing that the place was added to the land; and
(d)
includes land that was a hotel or motel, to the extent to which, by a conversion, it becomes places that are configured as self-contained residences or abodes, and the conversion is recorded in the records of a local authority or building consent authority as having been “completed” on or after 27 March 2020.
Residential land company
(8)
Residential land company means a company for which the ratio calculated using the following formula and expressed as a percentage is equal to or greater than 50% at any time during the relevant income year:
(disallowed property + indirect disallowed property) ÷ total assets.
Definition of items in formula
(9)
In the formula in subsection (8),—
(a)
disallowed property is the value of the company’s property that is disallowed residential property, but excluding property described in section DH 4(2) or (3):
(b)
indirect disallowed property is the value of shares that the company holds in other companies that are residential land companies:
(c)
total assets is the total value of the company’s property.
Residential land wholly-owned group member
(10)
Residential land wholly-owned group member means a company that is a member of a wholly-owned group of companies for which the ratio calculated using the following formula, expressed as a percentage, is equal to or greater than 50% at any time during the relevant income year:
(disallowed property + indirect disallowed property) ÷ total assets.
Definition of items in formula
(11)
In the formula in subsection (10),—
(a)
disallowed property is the value, on a consolidated basis, of the wholly-owned group’s property that is disallowed residential property, but excluding property described in section DH 4(2) or (3):
(b)
indirect disallowed property is the value of shares that the wholly-owned group’s interest holds in non-group companies that are residential land companies:
(c)
total assets is the total value, on a consolidated basis, of the wholly-owned group’s property.
Defined in this Act: code compliance certificate, company, disallowed residential property, excepted residential land, grandparented transitional loan, income year, land, new build land, residential land company, residential land wholly-owned group member, trustee, wholly-owned group
DH 6 Residential property percentage
Residential property percentage
(1)
Residential property percentage is the amount, for an interposed residential property holder (the person), calculated using the following formula, expressed as a percentage:
disallowed assets ÷ total assets.
Definition of items in formula
(2)
In the formula in subsection (1)—
(a)
disallowed assets means the value of the person’s property that is disallowed residential property, but excluding—
(i)
property described in section DH 4(1) to (3); and
(ii)
for a close company, property that is subject to subpart DG (Expenditure related to use of certain assets):
(b)
total assets means the value of the person’s property excluding, for a close company, property that is subject to subpart DG.
Special rule: interposed residential property holder
(3)
If the person is a company, the items disallowed assets and total assets in this section are calculated to also include assets held by lower tier companies to the company by applying section YC 4 (Look-through rule for corporate shareholders), treating the person as the ultimate shareholder, to attribute, in proportion to the relevant voting interests and market value interests under that section, those lower tier assets.
Defined in this Act: close company, disallowed residential property, interposed residential property holder, market value interest, residential property percentage, voting interest
DH 7 Transitional residential interest
Transitional residential interest
(1)
Transitional residential interest means interest, for a person and a grandparented transitional loan, that is,—
(a)
interest for the loan’s principal to the extent to which the interest is incurred for disallowed residential property; or
(b)
if the loan (the underlying loan) is for both disallowed residential property and property that is allowed property described in subsection (3)(b), and the portion incurred for disallowed residential property can not be determined, the portion of underlying interest calculated by reference to a notional loan principal that the person is treated as having used to acquire, on 26 March 2021, the disallowed residential property to which the underlying loan relates. The initial notional loan principal is calculated using the formula in subsection (2) and the treatment of repayments is provided in subsection (4).
Transitional residential interest: loan portion when tracing cannot be determined: initial notional loan balance
(2)
For the purpose of subsection (1)(b), the notional loan principal is calculated using the following formula, treating a negative amount as zero:
outstanding borrowings − allowed property.
Definition of items in formula
(3)
In the formula in subsection (2),—
(a)
outstanding borrowings is the principal of the underlying loan, determined on 26 March 2021, to the extent to which it is for both disallowed residential property and property that is allowed property described in paragraph (b):
(b)
allowed property means the total of—
(i)
the value of the person’s property, determined on 26 March 2021, that is not disallowed residential property, but ignoring property that is not used in deriving assessable income; and
(ii)
to the extent to which the person’s property is disallowed residential property described in section DH 4, the value of that property, determined on 26 March 2021:
Transitional residential interest: repayments
(4)
A repayment of the underlying loan is applied against the notional loan principal to reduce it. However, if the source of the repayment is the disposal of allowed property described in subsection (3)(b), the notional loan principal is not reduced by the repayment.
Defined in this Act: assessable income, disallowed residential property, grandparented transitional loan, interest, loan
DH 8 Deduction not allowed
Deduction denied
(1)
A person is denied a deduction for interest if and to the extent to which the interest is—
(a)
incurred for disallowed residential property, but excluding interest for a grandparented transitional loan:
(b)
transitional residential interest:
(c)
incurred in relationship to legal or beneficial ownership of an interposed residential property holder.
Denial limited: transitional residential interest
(2)
The amount of the deduction denied for transitional residential interest is limited to the following percentages for the following periods:
Period that transitional residential interest is incurred | Percentage denied |
1 October 2021 to 31 March 2022 | 25% |
1 April 2022 to 31 March 2023 | 25% |
1 April 2023 to 31 March 2024 | 50% |
1 April 2024 to 31 March 2025 | 75% |
On and after 1 April 2025 | 100% |
Denial limited using quarterly calculation periods: owners of interposed residential property holders
(3)
The amount of the deduction denied for interest (the interest) incurred as the owner or to become an owner of an interposed residential property holder that is a close company is limited, for an income year, to the amount calculated quarterly using the following formula and summed for the entire income year:
interposed interest × interposed residential property percentage.
Definition of items in formula
(4)
In the formula in subsection (3)—
(a)
interposed interest is the interest, to the extent to which it is incurred in the relevant quarterly calculation period:
(b)
interposed residential property percentage means the residential property percentage for the interposed residential property holder, calculated as described in section DH 6(3) at the end of the relevant quarterly calculation period.
Defined in this Act: close company, disallowed residential property, deduction, grandparented transitional loan, income year, interest, interposed residential property holder, residential property percentage, transitional residential interest
DH 9 Exception to limited denial of deductions: loans denominated in foreign currencies
Despite section DH 8(2) and (3), a deduction is denied for all interest to which section DH 8(1) applies that is incurred under a loan in foreign currency.
Defined in this Act: deduction, interest, loan
DH 10 Limited denial of deductibility: simplified calculation of interest affected
Application of section
(1)
This section applies to a person who chooses to rely on the method of calculation it contains for calculating interest incurred under some loans and subject to limited denial of deductibility under this subpart.
Purpose of section
(2)
This section is intended to simplify the calculation, for a loan that may be drawn down in several tranches, of the amount of interest incurred in the period (the affected interest period) from 1 October 2021 to 31 March 2025 that is—
(a)
described in section DH 8(1); and
(b)
subject to limited denial of deductibility under section DH 8(2).
Affected loan balance
(3)
The amount of the loan (the affected loan balance) that is allocated to disallowed residential property, and under which interest described in section DH 8(1) is incurred, is determined for the date (the start date) that is the later of 26 March 2021 and the start of the term of the loan.
Initial loan balance
(4)
The affected loan balance (the initial loan balance) at the start date is used to calculate the amount of interest described in section DH 8(1) incurred under the loan until the affected loan balance is adjusted under subsection (4).
Adjustments to affected loan balance
(5)
If a further amount is borrowed under the loan after the start date, the affected loan balance is, on the date when the further amount is applied, —
(a)
reduced, if the further amount is applied for a purpose that does not meet the requirements for a loan giving rise to interest described in section DH 8(1); or
(b)
increased, if the further amount gives rise to interest described in section DH 8(1).
Interest affected by limited denial of deductibility
(6)
For the affected interest period, the amount of interest incurred under the loan that is affected by limited denial of deductibility under section DH 8(2) is the amount that can be attributed to—
(a)
the initial loan balance, if the affected loan balance equals or exceeds the initial loan balance; or
(b)
the affected loan balance, if the affected loan balance is less than the initial loan balance.
Defined in this Act: disallowed residential property, interest, loan
DH 11 Denied amounts: treatment upon disposal of disallowed residential property
Disposal subject to section CB 6A or CZ 39: denied amount included as cost
(1)
An amount that relates to disallowed residential property and is denied under section DH 8 as a deduction that would have otherwise been allowed for a person is treated under section DB 23 (Cost of revenue account property) as a cost for the person of the disallowed residential property in the income year of the disposal of the disallowed residential property if the amount derived from the disposal is income under section CB 6A or CZ 39 (which relate to disposals of residential land within a given period from acquisition).
Disposal not subject to section CB 6A or CZ 39: denied amount allocated under section EL 4 or EL 7
(2)
An amount that relates to disallowed residential property and is denied under section DH 8 as a deduction that would have otherwise been allowed for a person is allowed under this section as a deduction in the income year of the disposal of the disallowed residential property, and is subject to allocation under subpart EL (Allocation of deductions for excess residential land expenditure), if the amount derived from the disposal of the disallowed residential property—
(a)
is income under a section other than section CB 6A or CZ 39; and
(b)
is not income under section CB 6A or CZ 39.
Defined in this Act: deduction, disallowed residential property, income, income year
DH 12 Valuation
Land not used in undertaking creating new build land
(1)
For the purposes of this subpart, a person’s land, excluding land described in section DH 4(2) and (3), is—
(a)
valued at its most recent capital value or annual value set by a local authority; or
(b)
if the land was acquired after the most recent local authority valuation, it is valued at its acquisition cost or, in the case of an associated person acquisition, its market value.
Land used in undertaking
(2)
For the purposes of this subpart, to the extent to which subsection (1) does not apply for a person’s property, the property is—
(a)
valued using its tax book value; or
(b)
if the person prepares financial accounts according to relevant accounting standards or legislative standards, valued using the financial accounts’ valuation.
Defined in this Act: associated person, land, local authority, market value