TAX CHANGES APPLYING TO BUILD-TO-RENT SECTOR

In mid-2021, the New Zealand government announced an exemption to the interest-deductibility rules for some landlords and developers in the build-to-rent (BTR) sector.

This exemption is aimed at encouraging investment in large scale BTR developments to improve the long-term, quality rental housing supply.  These are generally developed and professionally managed by institutional investors, developers and community housing providers. The policy aligns with the government’s goal of creating a more definite BTR asset class in the country and bolstering housing supply more widely.

Requirements to bear in mind

To get the benefit of this new exemption, applicants must meet certain conditions.  In particular, the BTR development must meet the following requirements:

• must involve at least 20 dwellings, across one or more buildings.
• the landlord or manager must always offer tenants a fixed term tenancy of no less than 10 years.
• ensure the tenancy allows, without penalty, tenant personalisation of the dwelling.
• ensure the tenancy provides that a tenant may cancel the tenancy with 56 days’ notice, without penalty.

If a BTR development meets all those requirements, then the developer/landlord will be able to deduct their associated interest costs for as long as they own it.

What to Know

The new exemption comes into effect on 1 July 2023, and it applies to all BTR developments, whether completed before or after that date.  In the case of qualifying BTR developments completed before that date, the developer/landlord will be able to deduct interest back-dated to 1 October 2021.

Qualifying BTR developments will lose their interest deductibility status should they fail to meet any of the above requirements at a later date. This will incentivise landlords of qualifying BTR developments to continue to observe & perform these obligations, or face considerable financial risk by losing that status.

While this exemption has been welcomed by some, it has also been criticised for its 20-dwelling threshold, which some feel could limit the ability of smaller BTR developments to offer longer-term tenancies and contribute to greater housing availability. Overall, the exemption is seen as a step towards addressing some of the challenges faced in the New Zealand housing market, and utilising the BTR sector to address housing shortages. However, hurdles such as continued uncertainty about the liquidity of BTR assets for overseas investors, compatibility with current tenancy laws, and a GST policy that favors build-to-sell developments remain. There are also questions relating to auditing, monitoring and enforcement of the ongoing compliance of qualifying BTR developments.

Conclusion

It will be interesting to see whether the government will make further changes to address these challenges and encourage the growth of the BTR sector in the country.

At Wakefields Lawyers, we understand the complexities involved in the build-to-rent sector and we provide expert legal advice to landlords and developers on a range of property matters. If you have any inquiries relating to build-to-rent developments, or property law more generally, contact us on (04) 970 3600 or email info@wakefieldslaw.com.

– Billy Hansen (Solicitor)