What exactly is a 'new build' and why does it matter?
The government’s tax changes have shifted the Brightline from five to ten years and removed the deductibility of interest associated with borrowing to buy residential property. However, both rules contain exemptions for ‘new build’ residences.
This means that if you purchase a new build, interest deductions are still allowed for a twenty-year period from time the property’s code of compliance certificate (CCC) is issued – provided this was after 27 March 2020.
For Brightline purposes, new builds retain the five-year Brightline period, as long as they’re acquired within twelve months of the property’s CCC being issued.
Given these significant tax consequences, it’s important to understand exactly what constitutes a new build – and you may be surprised by what falls within the definition.
What constitutes a new build?
New build land is typically defined as land to which a self-contained home or residence has been added. A CCC must have been issued on or after 27 March 2020, showing that the home or residence has been added to the land.
However, the term ‘new build’ does not mean the property has to be constructed from new materials. Essentially, a new build is simply ‘a new legal residence’ – regardless of whether it’s constructed from new or non-new materials, or is even a relocated existing building.
Size also is irrelevant. A new build could be a tiny house, as long as it’s self-contained with its own kitchen and bathroom, and has had a CCC certificate issued once it’s positioned on the land.
There are a number of other situations that see a property fall within the ‘new build’ definition:
Where a CCC (issued on or after 27 March 2020) shows that a property already on the land has been converted into a self-contained residence. For example, a commercial building or an existing home that’s been converted into one or more self-contained residences.
Where building consent records show the conversion of a property from a hotel or motel into one or more self-contained residences (completed after 27 March 2020). For example, a motel building that has been legally converted into self-contained apartments.
Where a property has been removed from the earthquake prone buildings (ERB) register. It must have either received its CCC on or after 27 March 2020 (evidencing the building work to remediate the place is complete) or have building consent authority records showing that the remediation work was completed after 27 March 2020 and verified by a qualified engineer. For example, an existing apartment block in Christchurch that was on the ERB register following the 2011 earthquake, which has been remediated and removed from the register.
Where a property which was not previously weather tight has had a CCC issued (on or after 27 March 2020) showing that at least 75% of its cladding has been replaced. For example, a leaky home that’s been acquired and reclad to deal with the weather tightness issues, making it weather proof and fit for purpose again.
Constraints to be aware of
It’s important to remember that, in order to qualify for a five-year rather than 10-year Brightline period, a new build must have been acquired within twelve months of the CCC being issued. This limits the time period for which a property can be considered a new build. On the other hand, the right to deduct interest on a new build extends from owner to owner for a twenty-year period from the issuance of the CCC, so no such twelve-month limitation exists.
This means that it’s possible to acquire a property with a CCC issued after 27 March 2020 and find that, while you gain an interest deduction on money borrowed to buy it, it’s still on a 10-year Brightline because the acquisition was later than 12 months from the CCC being issued.
Another issue is that the definition of a new build in section DH 5(7) of the Income Tax Act implies that sometimes only part of a piece of land may be considered new build land. For example, the construction of a new minor dwelling on land already containing a property may provide new build status to the land on which the new dwelling is built, but not the land containing the existing property.
The definition also states a new build residence or home must be ‘self-contained’. This means it must be able to be lived in by a single household without any need to share essential facilities (such as a kitchen or a bathroom) with another household.
In summary, for the purposes of the recent tax changes, the definition of a new build covers considerably more than the obvious example of building a single new home on a section.
So, if you’re seeking the opportunity to take on a property project that offers interest deductibility, understanding the range of projects defined as ‘new build’ will allow you to cast your net far wider.
