In response to concerns about housing affordability and the impact of property investment on the housing market, the New Zealand Labour Government previously introduced changes to interest deductibility rules. These changes were implemented to rebalance the housing market and make homeownership more accessible for first-home buyers.
Interest deductibility refers to the ability of property owners to deduct the interest paid on mortgages or loans taken out for investment properties from their taxable income. This deduction has long been a valuable tool for property investors, as it helps to reduce the overall tax burden associated with owning rental properties, but Labour’s ruling around this removed interest from the equation when calculating taxable profit, meaning landlords were required to pay more tax.
On 10th March 2024, the recently elected National Coalition government announced a phased restoration of interest deductibility. Associate Finance Minister David Seymour stated “Landlords had been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis. These costs are inevitably passed on to tenants, one of the reasons New Zealand has all time high rental costs.
“This heaped pressure on landlords and renters alike by reducing the number of rentals, pushing rents up, and making it harder for Kiwis to save for their first home.”
The government has now agreed to a phased restoration of interest deductibility over the coming financial years:
- 80% Deduction (2024/25 Financial Year): From 1st April 2024 property owners can deduct 80% of their interest expenses. This adjustment aims to gradually ease the transition for investors while still moving towards the ultimate goal of full interest deductibility.
- 100% Deduction (2025/26 Financial Year): By the 2025/26 financial year, the restoration of interest deductibility will be complete, allowing property owners to deduct 100% of their interest payments on investment properties from their taxable income. This represents a return to the previous tax treatment of investment property interest expenses.
Moving forward, investors should adjust their tax planning strategies to account for the phased restoration of interest deductibility. This may involve re-evaluating cash flow projections, estimating tax liabilities, and optimising deductions to maximise tax efficiency.
The restoration of interest deductibility could influence investment decisions, particularly for investors considering new property acquisitions.
The phased restoration represents a significant policy change. By gradually increasing the deductibility allowance over several financial years, the government aims to strike a balance between supporting property investment and addressing housing affordability concerns.
As these changes take effect, property owners are advised to stay informed, adapt their financial strategies, and seek professional advice to navigate the evolving landscape successfully.
Sources:
https://www.beehive.govt.nz/release/government-agrees-restore-interest-deductions
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