New Zealand Government agrees to restore interest deductions

Associate Finance Minister David Seymour has today announced that the Government has agreed to restore deductibility for mortgage interest on residential investment properties.

“Help is on the way for landlords and renters alike. The Government’s restoration of interest deductibility will ease pressure on rents and simplify the tax code,” says Associate Finance Minister David Seymour.

“We are phasing back in the ability to deduct interest expenses from 1 April 2024 when all affected taxpayers will be able to claim 80 percent of their interest expenses and 100 percent from 1 April 2025 onwards. 

“Landlords have 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.

“Competition helps keep prices affordable. Reducing supply reduces the number of options and drives up prices. Removing the ability for landlords to claim interest expenses made residential properties less attractive and reduced the pool of properties for tenants to choose from.

“To overcome New Zealand’s many challenges there needs to be an environment where investment and development is encouraged. This change is a step in the right direction.”

These changes are expected to be added to the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill, which is currently before the select committee.

A welcome relief to Mum and Dad property investor

This is a welcome relief to Mum and Dad property investors. Under the Labour Coalition Government, the ability to deduct interest was being phased out between 1 October 2021 and 31 March 2025. At present, you are entitled to deduct: 1 April 2023 to 31 March 2024 50% 1 April 2024 to 31 March 2025 25% On or after 1 April 2025 0%,

Meet Isla and Manaia, a hardworking couple who diligently planned for their future by investing in a rental property. They borrowed to purchase this property, and like many investors, relied on the ability to deduct mortgage interest from their taxable income. However, the 2021 tax changes implemented by the Labour government upended their financial calculations.

Artificial inflation of profits:

One of the key issues Mum and Dad investors like Isla and Manaia faced was the artificial inflation of profits due to the gradual reduction and eventual removal of tax deductibility on mortgage interest. Under Labour's rules, the interest paid on residential properties acquired on or after 27 March 2021 was being phased out as an expense. That meant that even if the rental income falls short of covering the mortgage payments, investors were still expected to pay taxes on the "imaginary" profit.

Isla and Manaia found themselves in this very situation. Despite their rental property generating only enough income to cover the mortgage interest costs, they were being required to pay taxes on the fictional profit that the Labour Government insists they have made. Their modest means and prudent investment decisions were being jjeopardised by an unjust tax burden.  

Luckily for them that has been changed just in time to prevent them from having to sell their rental property. They will now be able to enjoy their rental property income in their retirement.