Inland Revenue and Treasury oppose build-to-rent property tax break

Housing Minister Megan Woods happy to provide some property investors with tax breaks to increase the supply of rentals. Photo / Mark Mitchell

A government document reveals Inland Revenue and the Treasury opposed the Government's decision to give the owners of "build-to-rent" (BTR) housing a tax break.

The Government in August announced it would tweak its interest limitation rule, introduced in 2021, to exempt property specifically built to be rented out. The decision followed extensive lobbying by developers and investors.

A regulatory impact assessment – prepared by Inland Revenue for the Government in June, ahead of it making its decision – shows the tax department believed a carve out was unnecessary and unfair towards other property investors.

The rule prevents property investors from writing off mortgage interest as an expense when paying tax.

"New builds" have always been exempt, meaning an investor can keep deducting interest as an expense to reduce their tax bill for 20 years from the time a code compliance certificate is issued for their property. The exemption applies to that property for its first 20 years, regardless of who owns it during that time.

So, under the initial design of the rule, a company that built a block of flats with the intention of renting them out, wouldn't have had to pay more tax for 20 years anyway.

Nonetheless, the likes of the Property Council industry group protested, saying the exemption didn't go far enough.

Ockham chief executive, Mark Todd, in November last year argued, "It is odd that [Housing Minister] Megan Woods supports the BTR sector to provide more new, warm, secure tenure properties but [Revenue Minister David] Parker is happy to kill off providers already delivering on government policy.

"I may be forced to sell 85 rental places worth $60 million to $80m if interest, which is the main cost of owning these buildings, becomes non-deductible."

Woods responded to the sector's concerns. In August she announced BTR would be exempt from the interest limitation rule.

"We recognise the big role the build-to-rent sector can play in filling a gap in the general rental market by increasing the supply, density, and diversity of housing," she said in a press release, which also included comments from the Property Council in support of the change.

Woods also clarified that BTR housing would need to offer tenants leases of at least 10 years.

"Tenants can ask for shorter agreements if they wish and the development will still qualify for the exemption. Tenants will be able to break their tenancy agreements at any time, with a 56-day notice period," she said.

The Government defined BTR as a single development, with one owner, that consists of at least 20 dwellings.

It also decided a BTR development must offer tenants explicit personalisation policies over and above the Residential Tenancies Act 1986.

Nonetheless, Inland Revenue was still of the view, "There is nothing inherent in BTR that makes it different from other residential property, apart from scale."

It said an exemption "could be viewed as inequitable, because it would benefit large investors but provide no relief for smaller investors who hold similar properties". It noted, "BTR investors tend to be large institutional investors".

Notwithstanding the fact Inland Revenue opposed the introduction of the interest limitation rule to begin with, it said an exemption for BTR would undermine the rule's purpose.

Summarising the Treasury's view, Inland Revenue said, "The sector will largely be comprised of new build developments that will already receive a 20-year exemption, and there is little evidence that the sector requires additional financial support via the tax system.

"The sector continues to expand in full knowledge of the tax changes, and several public funding-streams are available to directly support its continued development without the complexity outlined in this paper."

However, Inland Revenue noted the Ministry of Housing and Urban Development supported the BTR tax break, arguing the 20-year "new build" exemption wouldn't go far enough to encourage investment in purpose-built rentals.

The ministry believed, "The initial policy (for interest limitation) did not take into full account the diversity of residential property supply, and was mostly built around standalone properties. Emerging residential models such as BTR were not captured in this model."

The BTR exemption is being made via the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill (No 2), which had its first reading in Parliament last week and has been referred to the Finance and Expenditure committee.