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  • Interest deductibility on property

    Has anyone read the legislation to see if "stacking applies".....

    Option 2:

    Stacking.

    Under this option, taxpayers would allocate their pre-27 March loans, excluding any loans traced to private purposes,16 first to assets that are not residential investment properties.

    The rationale for this approach is that well-advised taxpayers would be able to restructure to achieve the same tax outcome under tracing anyway.

    17 Allowing this tax outcome without requiring a restructure would therefore reduce compliance costs and help taxpayers who do not have 16

    Where loans have been applied to both taxable and private purposes, taxpayers have always needed to trace to ensure that they do not claim interest deductions for borrowings applied to private purposes.

    17 For example, a taxpayer could sell their non-residential assets to a wholly-owned company for market value, and the company could borrow to acquire those assets. The taxpayer would then use the sale proceeds to repay the pre27 March loan.

    As the company’s borrowings are traced to the acquisition of non-residential business assets, its interest deductions would be allowed in full (subject to possible application of the general anti-avoidance rule in section BG 1 of the Income Tax Act 2007) professional advice.

    For this option, stacking will be based on the market value of assets as at 26 March 2021.

    Example 10: Transition of pre-27 March loan As at 26 March 2021, Tiffany owns two properties, both acquired at around the same time in the 1990s: • a residential rental property purchased for $300,000, with improvements of $100,000 carried out in the 2000s; and • a commercial rental property, purchased for $400,000, with no improvements. She acquired the two properties using a combination of loans and savings.

    Over the years, Tiffany has refinanced and restructured her loans several times and has made many repayments. As at 26 March 2021, she has a single outstanding loan of $200,000 and no other debt. Although Tiffany never used the loans for personal purposes, she did not trace exactly how the borrowed funds were applied to each property in the past and does not have the records to do so now.

    Option 1: apportionment based on cost

    Under the apportionment approach, 50% (being $400,000 divided by the total asset costs of $800,000) of Tiffany’s $200,000 loan is treated as having been used to acquire the commercial property. The remaining 50% of her loan is treated as having been used to acquire the residential property. From 1 October 2021 until the loan is fully repaid, Tiffany will be able to deduct 50% of the interest expenditure incurred under her loan. The remaining 50% of interest expenditure will be subject to phasing.

    Option 2: stacking based on market values Under the stacking approach,

    Tiffany’s $200,000 loan is stacked against her commercial property first. Assuming the market value of the commercial property on 26 March 2021 is at least $200,000, Tiffany can continue to deduct all her interest expenditure under the loan indefinitely
    Last edited by donna; 04-10-2021, 07:21 PM.

  • #2
    Hi Beano

    Supplementary Order Paper No.64 (28 September, 2021), under Section DH 6 and DH 7, may be what you are looking for. It is rather long to copy and paste, and it does not mention "stacking" as used in your quoted passage above from the June 2021 IRD Discussion Document, but I think it has the same effect. Who knows if it will eventually apply, as there will be submissions on this Supplementary Paper, and a commentary on this will be released on 12 October.

    I think it is really bad that the rules come into effect on 1 October 2021, but the details are released only 2 days earlier for people to digest and comment on. Not a great way to treat the people who are affected by these rules. It appears to be a little disrespectful, or unkind.

    There is a way for people to still claim interest deduction for residential properties that are not new builds, by leasing them to Kainga Ora or other community housing providers, as mentioned in this article:



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    • #3
      So many Kiwis have leveraged their property assets to fund their business - is there any recourse for them within the fine detail of the interest deductibility rules?

      The transactions would be evidence of where the $$ went i.e. to the business account - as well as how it was spent so there should be room for movement aye.

      cheers,

      Donna

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      • #4
        Originally posted by donna View Post
        So many Kiwis have leveraged their property assets to fund their business - is there any recourse for them within the fine detail of the interest deductibility rules?

        The transactions would be evidence of where the $$ went i.e. to the business account - as well as how it was spent so there should be room for movement aye.

        cheers,

        Donna
        that is fine for ten years but when you have to go back fifty years it is pretty difficult hence "stacking " seems like the answer.

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