Good news for the construction-to-rent sector as part of the change in government taxation

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The government’s announcement on Friday that it will now grant certain landlords an exemption from the new interest deductibility rules is good news for the build-to-let (BTR) sector.

Having barred landlords from deducting interest paid on rental properties from their tax bills earlier this year, some are calling it a U-turn; others a fine-tuning of the policy to help move New Zealand towards a more sophisticated rental stock and rental security.

The exemption applies to owners of new and existing build-to-let developments, and applies to one development for 20 years. To qualify (among other requirements):

  • a landlord will have to offer tenants a 10-year lease on 56 days’ notice – although there is no obligation for the tenant to take the 10-year lease;
  • housing estates must also have at least 20 units (in one or more buildings, which may include mixed-use buildings).

The 20-unit threshold has been criticized by those offering longer-term leases in smaller builds, but indicates an intention to push the domestic BTR sector to provide larger-scale developments typical of overseas BTRs and to create a more defined BTR asset class.

The exemption will apply retrospectively from October 1, 2021.

The government has made it clear that the exemption is aimed at the BTR sector, which focuses on high-quality rentals built at pace and scale. The pace and scale does not appear to have influenced the government’s response to calls for change in the BTR sector – guidance issued by the Overseas Investment Office last April (see our alert here) was the only policy response to the sector this trimester. There remain major hurdles for the sector, including continued uncertainty over the liquidity of a BTR asset with respect to foreign investors, unsuitable rental laws and a GST treatment that still favors construction developments to sell. We look forward to seeing if the government will make any further changes to unlock BTR’s full potential.

Housing Minister Megan Woods’ full announcement on the interest deductibility exemption can be viewed here.

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