Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill

49 New sections DB 18AC to DB 18AK inserted

(1)

After section DB 18AB, insert:

DB 18AC Ring-fenced allocations for residential rental property portfolios
When this section applies

(1)

This section applies, for a person that is not a widely-held company, to an amount of the person’s deductions (residential rental deductions), for an income year, that relate to residential rental property owned by the person during—

(a)

the income year:

(b)

previous income years.

Basis for allocation of deductions

(2)

The amount of residential rental deductions allocated to an income year, including any amounts that have been carried forward and allocated under subsection (4) and sections DB 18AD(4) and DB 18AH(4), is no more than the amount calculated using the formula—

residential rental property income + net disposal income.

Definition of items in formula

(3)

In the formula in subsection (2),—

(a)

residential rental property income is the amount of income under sections CC 1 to CC 2 (which relate to income from land use) that the person derives, for the income year, that relates to residential rental property owned by the person:

(b)

net disposal income is—

(i)

zero, if any excess deductions have been treated under section DB 18AD(4) or DB 18AH(4) as deductions that relate to residential rental property owned by the person; or

(ii)

the amount of net income for the year that the person would have if the only income they derived was from the disposal of residential rental property, if subparagraph (i) does not apply.

Excess allocations: carried forward and reinstated next year

(4)

If, at the end of the income year, the person owns residential rental property or land that was residential rental property at some time when they owned the land, any excess deductions not allocated to the income year because of subsection (2) are carried forward and treated as—

(a)

deductions that relate to residential rental property owned by the person during a previous income year; and

(b)

allocated to the next income year.

Exception: taxable divestment of untainted residential rental property portfolio

(5)

Despite subsection (2), the amount of residential rental deductions allocated to an income year, including an amount that has been carried forward and allocated under subsection (4), is the amount given by the formula in subsection (6), when,—

(a)

at the start of the income year, the person owns—

(i)

residential rental property:

(ii)

land that was residential rental property at some time when they owned the land; and

(b)

at the end of the income year, the person owns neither residential rental property nor land that was residential rental property at some time when they owned the land; and

(c)

the person derived assessable income from each disposal they made of land that was residential rental property at some time when they owned the land since the later of—

(i)

the last day, before the start of the income year, on which the person did not own land that was residential rental property at some time when they owned the land; and

(ii)

the start of the 2019–20 income year; and

(d)

the person has not treated any excess deductions as deductions that relate to that residential rental property or land—

(i)

under section DB 18AD:

(ii)

under section DB 18AH.

Deductions amount: taxable divestment of untainted residential rental property portfolio

(6)

The formula, for the purposes of subsection (5), is—

current year deductions + ring-fenced deductions.

Definition of items in formula

(7)

In the formula in subsection (6),—

(a)

current year deductions is the amount of deductions for expenditure or loss incurred by the person, for the income year, that relate to residential rental property owned by the person during the income year that the person would be allowed in the absence of this section:

(b)

ring-fenced deductions is the amount that has been carried forward and allocated to the income year under subsection (4).

Exception: taxable divestment of tainted residential rental property portfolio

(8)

Despite subsection (2), the amount of residential rental deductions allocated to an income year (the current year), including any amounts that have been carried forward and allocated under subsection (4) and sections DB 18AD(4) and DB 18AH(4), is no more than the amount given by the formula in subsection (9), when,—

(a)

at the start of the income year, the persons owns—

(i)

residential rental property:

(ii)

land that was residential rental property at some time when they owned the land; and

(b)

at the end of the income year, the person owns neither residential rental property nor land that was residential rental property at some time when they owned the land; and

(c)

the person derived assessable income from each disposal they made of land that was residential rental property at some time when they owned the land since the later of—

(i)

the last day, before the start of the income year, on which the person did not own land that was residential rental property at some time when they owned the land; and

(ii)

the start of the 2019–20 income year; and

(d)

the person has treated excess deductions as deductions that relate to that residential rental property or land—

(i)

under section DB 18AD:

(ii)

under section DB 18AH.

Deductions amount: taxable divestment of tainted residential rental property portfolio

(9)

The formula, for the purposes subsection (8), is—

residential rental property income + net disposal income.

Definition of items in formula

(10)

In the formula in subsection (9),—

(a)

residential rental property income is the amount of income under sections CC 1 to CC 2 (which relate to income from land use) that the person derives, for the current year, that relates to residential rental property owned by the person:

(b)

net disposal income is the amount of net income for the year that the person would have if the only income they derived was from the disposal of residential rental property, treating each disposal of residential rental property the person has made since the later of the dates referred to in subsection (8)(c) as if it were a disposal of residential rental property made in the current year.

Restriction on reinstating excess allocations: continuity for companies

(11)

Despite subsection (4), the excess is not allocated to the next income year, and no deduction is allowed or allocated to any income year for the excess, if sections IA 5 and IP 3 (which relate to the carrying forward of tax losses for companies) would not have allowed the excess to be carried forward to that next income year in a loss balance, treating the excess as a tax loss component arising on the last day of the income year.

Meaning of residential rental property

(12)

In this section, residential rental property, for a person, does not include land owned by the person for which the person has made an election under section DB 18AG.

Defined in this Act: assessable income, deduction, dispose, income, income year, land, loss, loss balance, net income, residential rental property, tax loss component, widely-held company

DB 18AD Ring-fenced allocations for non-taxable divestments of residential rental property portfolios
When this section applies

(1)

This section applies when,—

(a)

at the start of an income year (the divestment year), a person owns—

(i)

residential rental property:

(ii)

land that was residential rental property at some time when they owned the land; and

(b)

at the end of the divestment year, the person owns neither residential rental property nor land that was residential rental property at some time when they owned the land; and

(c)

the person has not derived assessable income from each disposal they made of land that was residential rental property at some time when they owned the land since the later of—

(i)

the last day, before the start of the divestment year, on which the person did not own land that was residential rental property at some time when they owned the land; and

(ii)

the start of the 2019–20 income year; and

(d)

the person has an amount of deductions (residential rental deductions), for the divestment year, that relate to residential rental property owned by the person during—

(i)

the divestment year:

(ii)

income years before the divestment year; and

(e)

some or all of the person’s residential rental deductions are not allocated to the divestment year because of section DB 18AC(2); and

(f)

the person, in a later income year, owns—

(i)

residential rental property (the new portfolio property) for which the person has not made an election under section DB 18AG:

(ii)

a piece of residential rental property (the new piece of property) for which the person has made an election under section DB 18AG.

Elections to treat ring-fenced disposal deductions as relating to other property

(2)

The person may choose to treat some or all of the amount of the person’s residential rental deductions that are not allocated to the divestment year because of section DB 18AC(2) as the person’s deductions that relate to—

(a)

the new portfolio property:

(b)

the new piece of property.

How elections made

(3)

The person makes the election by notifying the Commissioner of it when they file their return of income for the later income year.

Treatment of ring-fenced disposal deductions when election made

(4)

If the person chooses to treat an amount of the person’s residential rental deductions that are not allocated to the divestment year because of section DB 18AC(2) as the person’s deductions that relate to the new portfolio property or the new piece of property, those excess deductions are carried forward and treated as—

(a)

deductions that relate to the new portfolio property or the new piece of property, as applicable; and

(b)

allocated to the later income year.

Restriction on reinstating excess allocations: continuity for companies

(5)

Despite subsection (4), the excess is not allocated to the later income year, and no deduction is allowed or allocated to any income year for the excess, if sections IA 5 and IP 3 (which relate to the carrying forward of tax losses for companies) would not have allowed the excess to be carried forward to that later income year in a loss balance, treating the excess as a tax loss component arising on the last day of the divestment year.

Meaning of residential rental property

(6)

In this section, unless the context requires otherwise, residential rental property, for a person, does not include land owned by the person for which the person has made an election under section DB 18AG.

Defined in this Act: assessable income, Commissioner, deduction, dispose, income year, land, loss balance, residential rental property, return of income, tax loss component

DB 18AE Main home exclusion for residential rental property

In sections DB 18AC, DB 18AD, and DB 18AG to DB 18AK, residential rental property, for a person and an income year, does not include land owned by the person during the income year, if the land has been used predominantly, for most of the income year, for a dwelling that was the main home for—

(a)

the person; or

(b)

a beneficiary of a trust, if the person is a trustee of the trust and—

(i)

a principal settlor of the trust does not have a main home; or

(ii)

if a principal settlor of the trust does have a main home, it is that dwelling that is their main home.

Defined in this Act: dwelling, income year, land, main home, principal settlor, residential rental property, trustee

DB 18AF Revenue account land exclusion for residential rental property

In sections DB 18AC, DB 18AD, and DB 18AG to DB 18AK, residential rental property, for a person and an income year, does not include land owned by the person during the income year if—

(a)

the person has notified the Commissioner that the land, if disposed of, will, under the laws of New Zealand for income tax in force at the time the person notifies the Commissioner, produce income for the person, regardless of when the disposal occurs; and

(b)

the person notifies the Commissioner of the person’s income and deductions, for the income year, that relate to the land—

(i)

in a manner that identifies the person’s income and deductions that relate to that specific land; or

(ii)

in a manner that does not identify the person’s income and deductions that relate to that specific land, and the only land for which the person notifies the Commissioner of the person’s income and deductions, for the income year, in such a manner is land described in paragraph (a).

Defined in this Act: Commissioner, deduction, dispose, income, income tax, income year, land, New Zealand, notify, residential rental property

DB 18AG Ring-fenced allocations for pieces of residential rental property
Elections to apply ring-fencing to pieces of residential rental property

(1)

A person who owns a piece of residential rental property (the piece of property) may choose to have their deductions (residential rental deductions), for an income year, that relate to the piece of property allocated under this section.

How elections made

(2)

The person makes the election by notifying the Commissioner of it when the person files their return of income for—

(a)

the income year in which the person acquires the piece of property; or

(b)

the 2019–20 income year, if the person acquired the piece of property before the 2019–20 income year.

Effect of election

(3)

The person must notify the Commissioner of the person’s income and deductions that relate to the piece of property in a manner that identifies the person’s income and deductions that relate to that specific piece of residential rental property for—

(a)

the income year for which the person makes the election; and

(b)

all later income years until the person disposes of the piece of property.

Basis for allocation of deductions

(4)

The amount of residential rental deductions allocated to an income year, including any amounts that have been carried forward and allocated under subsection (5) and sections DB 18AD(4) and DB 18AH(4), is no more than the amount of income under sections CC 1 to CC 2 (which relate to income from land use) that the person derives, for the income year, that relates to the piece of property.

Excess allocations: carried forward and reinstated next year

(5)

If the person does not dispose of the piece of property during the income year, any excess deductions not allocated to the income year because of subsection (4) are carried forward and treated as—

(a)

deductions that relate to the piece of property; and

(b)

allocated to the next income year.

Exception: taxable disposal of untainted residential rental property

(6)

Despite subsection (4), the amount of residential rental deductions allocated to an income year, including an amount that has been carried forward and allocated under subsection (5), is the amount given by the formula in subsection (7), when—

(a)

the person disposes of the piece of property during the income year; and

(b)

the person derives assessable income from the disposal; and

(c)

the person has not treated any excess deductions as deductions that relate to the piece of property—

(i)

under section DB 18AD:

(ii)

under section DB 18AH.

Deductions amount: taxable disposal of untainted residential rental property

(7)

The formula, for the purposes of subsection (6), is—

current year deductions + ring-fenced deductions.

Definition of items in formula

(8)

In the formula in subsection (7),—

(a)

current year deductions is the amount of deductions for expenditure or loss incurred by the person, for the income year, that relate to the piece of property that the person would be allowed in the absence of this section and section DB 18AC:

(b)

ring-fenced deductions is the amount that has been carried forward and allocated to the income year under subsection (5).

Exception: taxable disposal of tainted residential rental property

(9)

Despite subsection (4), the amount of residential rental deductions allocated to an income year, including any amounts that have been carried forward and allocated under subsection (5) and sections DB 18AD(4) and DB 18AH(4), is no more than the amount given by the formula in subsection (10), when—

(a)

the person disposes of the piece of property during the income year; and

(b)

the person derives assessable income from the disposal; and

(c)

the person has treated excess deductions as deductions that relate to the piece of property—

(i)

under section DB 18AD:

(ii)

under section DB 18AH.

Deductions amount: taxable disposal of tainted residential rental property

(10)

The formula, for the purposes of subsection (9), is—

residential rental property income + net disposal income.

Definition of items in formula

(11)

In the formula in subsection (10),—

(a)

residential rental property income is the amount of income under sections CC 1 to CC 2 (which relate to income from land use) that the person derives, for the income year, that relates to the piece of property they disposed of:

(b)

net disposal income is the amount of net income for the year that the person would have if the only income they derived was from the disposal of the piece of property.

Restriction on reinstating excess allocations: continuity for companies

(12)

Despite subsection (5), the excess is not allocated to the next income year, and no deduction is allowed or allocated to any income year for the excess, if sections IA 5 and IP 3 (which relate to the carrying forward of tax losses for companies) would not have allowed the excess to be carried forward to that next income year in a loss balance, treating the excess as a tax loss component arising on the last day of the income year.

Defined in this Act: assessable income, Commissioner, deduction, dispose, income, income year, loss, loss balance, net income, notify, residential rental property, return of income, tax loss component

DB 18AH Ring-fenced allocations for non-taxable disposals of pieces of residential rental property
When this section applies

(1)

This section applies when—

(a)

a person, during an income year, disposes of a piece of residential rental property for which the person has made an election under section DB 18AG; and

(b)

the person does not derive assessable income from the disposal of the piece of residential rental property; and

(c)

the person has an amount of deductions (ring-fenced disposal deductions) that relate to the piece of residential rental property that were not allocated to the income year because of section DB 18AG(4); and

(d)

the person, in a later income year, owns—

(i)

residential rental property (the new portfolio property) for which the person has not made an election under section DB 18AG:

(ii)

a piece of residential rental property (the new piece of property) for which the person has made an election under section DB 18AG.

Elections to treat ring-fenced disposal deductions as relating to other property

(2)

The person may choose to treat some or all of the amount of ring-fenced disposal deductions as the person’s deductions that relate to—

(a)

the new portfolio property:

(b)

the new piece of property.

How elections made

(3)

The person makes the election by notifying the Commissioner of it when they file their return of income for the later income year.

Treatment of ring-fenced disposal deductions when election made

(4)

If the person chooses to treat an amount of ring-fenced disposal deductions as the person’s deductions that relate to the new portfolio property or the new piece of property, those excess deductions are carried forward and treated as—

(a)

deductions that relate to the new portfolio property or the new piece of property, as applicable; and

(b)

allocated to the later income year.

Restriction on reinstating excess allocations: continuity for companies

(5)

Despite subsection (4), the excess is not allocated to the later income year, and no deduction is allowed or allocated to any income year for the excess, if sections IA 5 and IP 3 (which relate to the carrying forward of tax losses for companies) would not have allowed the excess to be carried forward to that later income year in a loss balance, treating the excess as a tax loss component arising on the last day of the income year.

Defined in this Act: assessable income, Commissioner, deduction, dispose, income year, loss balance, notify, residential rental property, return of income, tax loss component

DB 18AI Transfers of ring-fenced allocations for residential rental property within wholly-owned groups
When this section applies

(1)

This section applies when a company (company A) that is part of a wholly-owned group of companies has an amount of deductions (ring-fenced deductions), for an income year, that relate to residential rental property owned by company A that were not allocated to the income year because of section DB 18AC or DB 18AG.

Transfer of ring-fenced deductions

(2)

Company A may transfer some of all of the amount of ring-fenced deductions to another company (company B) that is part of the wholly-owned group of companies.

Notice

(3)

Company A must notify the Commissioner of an amount transferred under subsection (2) by the 31 March that, for company A and the income year, is the latest date to which the time for providing the return of income may be extended under section 37(5) of the Tax Administration Act 1994.

Treatment of transferred ring-fenced deductions

(4)

An amount of ring-fenced deductions that company A chooses to transfer to company B are treated as an amount of company B’s deductions, for the income year, that relate to residential rental property owned by company B during the income year.

Defined in this Act: Commissioner, company, deduction, income year, notify, residential rental property, return of income, wholly-owned group of companies

DB 18AJ Interest expenditure: interests in residential land-rich companies and trusts
When this section applies

(1)

This section applies when a person that is not a widely-held company has borrowed money (the borrowings) and used it to acquire an interest in a company or trust that is, for an income year, a residential land-rich entity.

Treatment of applied interest expenditure

(2)

For the purposes of section DB 18AC, for the person and the income year, the amount calculated using the formula in subsection (3) is, to the extent to which it exceeds the amount calculated using the formula in subsection (5), treated as an amount of the person’s deductions that relate to residential rental property owned by the person during the income year.

Applied interest expenditure

(3)

The first formula, for the purposes of subsection (2), is—

applied capital percentage × interest on borrowings.

Definition of items in formula

(4)

In the formula in subsection (3),—

(a)

applied capital percentage is the percentage of the residential land-rich entity’s capital that the residential land-rich entity has used to acquire residential rental property:

(b)

interest on borrowings is the amount of expenditure on interest incurred by the person, for the income year, that relates to the borrowings.

Share of profit formula

(5)

The second formula, for the purposes of subsection (2), is—

person’s interest × entity’s residential rental property profit.

Definition of items in formula

(6)

In the formula in subsection (5),—

(a)

person’s interest is, as applicable,—

(i)

the person’s voting interest, at the end of the income year, in the company that is the residential land-rich entity:

(ii)

the value of the person’s interest in residential rental property that is trust property of the trust that is the residential land-rich entity as a percentage of the trust’s assets, at the end of the income year:

(b)

entity’s residential rental property profit is the amount of net income for the year that the residential land-rich entity would have in the absence of sections DB 18AC and DB 18AG if the only income it derived was—

(i)

income under sections CC 1 to CC 2 (which relate to income from land use) that relates to residential rental property owned by the residential land-rich entity:

(ii)

from the disposal of residential rental property.

Meaning of residential land-rich entity

(7)

In this section and section DB 18AK,—

residential land-rich entity means—

(a)

a company, partnership, or look-through company that owns residential rental property, if over 50% of the company, partnership, or look-through company’s assets by value are residential land:

(b)

a trust with residential rental property as trust property, if over 50% of the trust’s assets by value are residential land.

Valuation of assets

(8)

For the purposes of subsections (6)(a)(ii) and (7), assets are valued at the end of an income year using,—

(a)

for land, including an improvement to land, the amount given under subsection (9):

(b)

for property with an adjusted tax value, its adjusted tax value:

(c)

for other property, its market value.

Valuation of land, including improvements to land

(9)

For the purposes of subsection (8)(a), the value of land, including an improvement to land, is the following amount, as applicable:

(a)

the amount given by the later of either—

(i)

its most recent capital value or annual value as set by the relevant local authority; or

(ii)

its cost on acquisition or, if the transaction involves an associated person, its market value:

(b)

if the land or improvement to land is a leasehold estate in land, the market value of the leasehold estate, which may be established by a valuation that is, or has been, made by a registered valuer no more than 3 years before the end of the income year.

Defined in this Act: adjusted tax value, associated person, company, deduction, dispose, income, income year, land, leasehold estate, local authority, look-through company, market value, net income, partnership, residential land, residential land-rich entity, residential rental property, voting interest, widely-held company

DB 18AK Interest expenditure: interests in residential land-rich partnerships and look-through companies
When this section applies

(1)

This section applies when a person that is not a widely-held company has borrowed money (the borrowings) and used it to acquire an interest in a partnership or look-through company that is, for an income year, a residential land-rich entity.

Treatment of applied interest expenditure: residential rental property portfolios

(2)

For the purposes of section DB 18AC, for the person and the income year, the amount calculated using the formula in subsection (3) is treated as an amount of the person’s deductions that relate to residential rental property owned by the person during the income year, to the extent to which it exceeds the amount of net income for the year the person would have in the absence of section DB 18AC if the only income they derived was—

(a)

income under sections CC 1 to CC 2 (which relate to income from land use) that relates to residential rental property owned by the person:

(b)

income from the disposal of residential rental property.

Applied interest expenditure: residential rental property portfolios

(3)

The formula, for the purposes of subsection (2), is—

applied capital percentage × interest on borrowings.

Definition of items in formula

(4)

In the formula in subsection (3),—

(a)

applied capital percentage is the percentage of the residential land-rich entity’s capital that the residential land-rich entity has used to acquire residential rental property:

(b)

interest on borrowings is the amount of expenditure on interest incurred by the person, for the income year, that relates to the borrowings.

Treatment of applied interest expenditure: pieces of residential rental property

(5)

For the purposes of section DB 18AG, for the person and the income year, and for a piece of residential rental property held by the residential land-rich entity but that the person is treated as holding by section HB 1 or HG 2 (which relate to LTCs and partnerships), the amount calculated using the formula in subsection (6) is treated as an amount of the person’s deductions that relate to the piece of residential rental property, to the extent to which it exceeds the amount of net income for the year the person would have in the absence of sections DB 18AC and DB 18AG if the only income they derived was—

(a)

income under sections CC 1 to CC 2 that relates to the piece of residential rental property:

(b)

income from the disposal of the piece of residential rental property.

Applied interest expenditure: pieces of residential rental property

(6)

The formula, for the purposes of subsection (5), is—

applied capital percentage × interest on borrowings.

Definition of items in formula

(7)

In the formula in subsection (6),—

(a)

applied capital percentage is the percentage of the residential land-rich entity’s capital that the residential land-rich entity has used to acquire the piece of residential rental property:

(b)

interest on borrowings is the amount of expenditure on interest incurred by the person, for the income year, that relates to the borrowings.

Defined in this Act: deduction, dispose, income, income year, look-through company, net income, partnership, residential land-rich entity, residential rental property, widely-held company

(2)

Subsection (1) applies for the 2019–20 and later income years, but does not apply to a deduction a person is allowed, for an income year before the 2019–20 income year, for an amount of expenditure or loss.