Tax Updates 27 July

Getting a cashback payment from the Bank – Taxable or not?

I’m a little surprised it has taken this long however finally IR has released a draft Question We’ve Been Asked (QWBA), reference PUB00504, addressing a question many mortgage holders have likely wondered about: is the cash incentive payment (also known as a cashback payment) that banks pay to attract or retain borrowers actually taxable income?

The short answer, according to the draft, is: it depends entirely on what the loan is used for.

What is a cash incentive payment (CIP)?

A CIP is a lump sum a bank pays a customer to secure or keep their loan business — typically calculated as a percentage of the amount borrowed. In exchange, the borrower usually agrees to keep the loan with that bank for a fixed period; leaving early can trigger a requirement to repay some or all of the CIP. More importantly, CIPs aren’t paid for a specific purpose, so the borrower is free to spend the money however they like.

The key distinction: private use vs income-earning use

The draft guidance focuses on borrowers who are cash basis persons under the financial arrangements rules (broadly, those with financial arrangements below certain size thresholds who haven’t elected to spread income and expenditure). Note the changes to the thresholds that apply for the 2025–26 and later income years: the absolute income/expense value is $200,000 or less, or the absolute value of all financial arrangements is $2 million or less on every day in the income year. And not forgetting the little ray of sunshine we received from the recent amendments — the $40,000 deferral threshold calculation has been removed!

• Private purpose (e.g., the family home): If the loan is used to buy a home to live in, the CIP has no tax consequences at all. It isn’t taxable when received, and it doesn’t create any tax obligations later — even though it must technically be run through a calculation at the end of the loan, the base price adjustment (BPA) formula, in essence will negate any deduction/income arising in virtually all cases.
• Income-earning purpose (e.g., a rental property): Here the CIP does eventually matter for tax — but not when it’s received. Instead, it’s swept into the BPA formula, which as alluded to previously is a wash-up calculation performed only in the final year of the loan (e.g., when the property is sold and the loan repaid). The BPA effectively nets the CIP against the interest paid in that final year:
  • If the CIP is larger than the final year’s interest, the difference is taxable income.
  • If the CIP is smaller than the final year’s interest, the difference is an additional interest deduction.

Worked example

A borrower receives a $10,000 CIP and pays $7,000 interest in the loan’s final year → $3,000 taxable income. The same $10,000 CIP but $15,000 interest paid in the final year → $5,000 extra interest deduction.

Other situations covered

The draft also works through some more complex scenarios, including:

• Loans used for mixed purposes (e.g., a home office used for business, where only a proportion of expenses — and the CIP — are apportioned to the income-earning use).
• The effect of now-repealed interest limitation rules on the BPA calculation for affected years.
• Borrowers who receive more than one CIP over the life of a loan.
• Borrowers required to repay part of a CIP (clawback) if they break their fixed-term commitment.

Why this matters

With cashback offers being a common feature of mortgage competition in New Zealand, this guidance gives borrowers — particularly landlords — clarity on when they need to factor a CIP into their tax return, and when they can safely ignore it. For most owner-occupiers, the message is reassuring: a cashback payment on the family home simply isn’t a tax issue.

Have your say

This is an exposure draft, meaning it represents Inland Revenue’s preliminary (though considered) view and is not yet binding. Submissions are open until 3 September 2026.

• Reference: PUB00504
• Feedback to: [email protected]