NZ Taxation Advisory Blog

T he ring-fencing of residential property deductions was introduced through the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019. This legislation established a framework for limiting how residential property deductions can be applied, with key provisions outlined under Subpart EL of the Income Tax Act 2007. Introduction of Subpart EL The new Subpart EL, titled Allocation of deductions for excess residential land expenditure , outlines the mechanism for allocating residential property losses. It emphasizes a more restrictive approach to deductions, ensuring residential losses cannot offset income from unrelated sources. Limited Allocation – Section EL 4(2) Section EL 4(2) specifies: "The amount of the deduction that may be allocated to the income year must be no more than the amount of the person’s residential income for the income year. An amount identified as a person’s residential income may be counted only once in making an...

Guide IR264 (Rental Income – Tax rules for those who rent out residential property and holiday homes) explains that any rent paid in advance is taxable in the year it is received. Principles from Legislation and Interpretations Interpretation Statement: IS 16/06 The general rule, as stated in ITA Section BD 3(2), is that income is allocated to the year in which it is derived. Income Credited to an Account According to ITA Section BD 3(4), if income is credited to an account and has not been accounted for earlier, it is considered "derived" when credited. This means: Income credited to a bank account that hasn’t been recognized in earlier years must be allocated to the year it was credited. Subpart BD of the ITA 2007 This section deals with Income, Deductions, and Timing, providing a framework for determining when income is derived and how it should be accounted for. Links Guide IR264 – Rental Income Tax Rules Interpretation Statement IS 16/06 ITA 2007, Section BD 3 Subpart BD...

The Inland Revenue Department (IRD) provides formal guidelines through "determinations" to set depreciation rates and asset classifications, ensuring taxpayers comply with tax legislation. What is a Determination? The IRD uses determinations to provide clarity and set standards for various tax issues, including: Accrual expenditure. Depreciation (e.g., DEP80). Financial arrangements. Foreign currency. Livestock valuations. Standard costs for service providers (e.g., boarding or childcare). These determinations ensure consistent tax treatment and simplify compliance for businesses and individuals. Determination DEP80 (2011) DEP80 introduces a comprehensive list of asset classes specific to the Residential Rental Property Chattels industry. These assets, such as carpets, dishwashers, and furniture, meet the three-point test, qualifying them as separate depreciable properties. The determination provides: Estimated Useful Life : The expected duration of use for each asset. Deprec...

Determining whether an item in a residential rental property is a separate depreciable property or part of the building is essential for tax compliance and claiming depreciation. Interpretation Statement IS 10/01 provides the Commissioner’s view and outlines a clear three-step test to classify such items. The Three-Step Test Step 1: Is the Item Attached or Connected to the Building? If the item is completely unattached, it is not part of the building. Plugged or wired items are considered unattached. If the item is attached, proceed to Step 2. Step 2: Is the Item an Integral Part of the Building? Would the rental property be incomplete or unable to function without the item? Integral items are considered part of the building. If not integral, proceed to Step 3. Step 3: Is the Item Part of the Building’s Fabric? Consider the nature and degree of attachment, as well as the difficulty and potential damage during removal. Items forming part of the building’s fabric are considered part of t...