Tax Updates: 8 May 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at

Short-stay Accommodation & Interest Limitation Rules

Inland Revenue (IR) has issued a draft Interpretation Statement (IS) aimed at providing guidance as to how the interest limitation rules should apply to short-stay accommodation scenarios. Its content is directed to natural persons and trustees only, and covers:

  • short-stay accommodation provided in a person’s holiday home,
  • short-stay accommodation provided in a person’s main home (e.g. a separate room),
  • short-stay accommodation provided in a separate dwelling on the same land as the person’s main home (e.g. sleep-out or cottage on same title),
  • short-stay accommodation provided on a separate property that is only used to provide short-stay accommodation (e.g. an apartment used exclusively to provide short-stays); and,
  • short-stay accommodation on a farm or a lifestyle block that does not qualify as a farm.

For the purpose of the IS, short-stay accommodation is accommodation provided to a guest for up to four consecutive weeks.

Firstly, it is worth noting that the interest limitation rules override all other deduction rules. If a deduction for interest is denied under the interest limitation rules, a deduction is not allowed under any other rule. However, interest that has been denied deductibility only under the interest limitation rules (i.e., it would otherwise have been deductible) may become deductible in the year the land is disposed of, if the disposal is taxable – e.g., if the disposal is taxed under the bright-line test. Because of this, it may be necessary to keep track of how much interest you would have been allowed to deduct if not for the interest limitation rules.

The IS is referenced PUB00441, and is a 78-page document, the first 58 pages providing guidance with respect to the application of the interest limitation rules to each of the five fact scenarios. The remaining 20 pages are dedicated to an appendix, which you could say is essentially a definitions document, explaining in more detail several of the key terms used in the general commentary, e.g., what is disallowed residential property, what is the new build land exemption, what is a grandparented transitional loan, what are the ring-fencing rules etc.

Each of the five scenarios is commenced by a table that outlines the general process you should follow – do the interest limitation rules apply (is it DRP, new build land etc)? Do the apportionment rules have application (mixed-used assets where MUA or standard deduction rules)? And do the ring-fencing rules apply (main home exclusion, is there a loss, do MUA apply etc)?

Also accompanying the detailed IS, is a 13-page fact sheet (essentially a cheat sheet to avoid the 78-page mammoth).

Finally, if you often rely on IR’s QB 19/05 to 19/09 to check expense deductibility in various short-stay accommodation scenarios, it should be noted that these were drafted prior to the introduction of both the interest limitation rules and the residential ring-fencing rules, so commentary within PUB00441 will therefore override certain commentary in those earlier releases.

The closing date for submissions on the IS is 16th May 2023.

Two bright-line related guidance docs issued

IR has issued two draft guidance docs on bright-line related issues, a Questions We’ve Been Asked (“QWBA”) and an Interpretation Statement (IS).

The QWBA is titled ‘If a person has two or more homes, which home is their main home for the purpose of the main home exclusion to the bright-line test?’, with the reference PUB00429.

The QWBA is aimed at providing guidance on how to determine a person’s main home for the purpose of the main home exclusion to the bright-line test, where the person uses two or more homes as a residence, and is an 11-page document.

The QWBA answer is that a person can have only one main home. If a person has two or more homes that they use as a residence, their main home is the one home with which they have the greatest connection. This means the one home with which the person has the most significant or important bond. This is an objective test and requires an overall assessment of the person’s circumstances. If a person has a family home they use as a residence and a holiday home, the greatest connection test does not apply. This is because the holiday home is not used as a residence. Their main home will be the family home.

In relation to the term “residence”, IR has previously concluded that it means a place where a person has a fixed presence and a degree of permanence. It is a place where a person has settled, where they ordinarily eat, live and sleep, and a place the person uses as a base for their daily activities and is the seat of that person’s domestic life and interests. “Used” means actual physical use of the dwelling and not intended use. Therefore, a dwelling is used as a residence when customarily or repeatedly used for this purpose.

When determining the one home with which the person has the greatest connection, IR lists the following five factors to be considered (the balance of the commentary in the QWBA dedicated to explaining each factor). The time the person has occupied the home; where the person’s immediate family lives; where the person’s social ties are strongest; where the person’s employment, business interests and economic ties are located; and where the person’s personal property is located.

PUB00429 concludes with several examples to illustrate the application of the “greatest connection” test, and the deadline for comment is 30th May 2023.

The IS is titled ‘Income tax – How absences affect the main home exclusion to the bright-line test’, with the same reference and comment deadline as the QWBA.

The focus of the IS is providing guidance on whether the main home exclusion to the bright-line test applies where a person leaves their dwelling during the bright-line period. It is a 23-page document, and it is important to note that the commentary predominantly applies to post-27th March 2021 residential land acquisitions – as prior to that date, the “main home” exclusion test is, in essence, a 50% use test – both in terms of time and area. In this latter respect, the commentary towards the end of the IS briefly discusses what is now legislatively referenced as the “bright-line grandparented home” exclusion, with a couple of examples to reflect how the old test was, in essence “an all-or-nothing” test.

So under the new main home exclusion test, it will apply if all days in the bright-line period (ten years or five years for new builds) are main home days – a term defined as a day within the bright-line period where the land has been used predominantly as a main home by the main home person; or not been used as a main home, provided those days do not exceed 365 consecutive days (known as the 12-month buffer).

Where all days within the bright-line period are not main home days, bright-line tax will be payable, however with an adjustment being allowed so tax is not payable for periods where the dwelling was used as a residence.

With respect to the 12-month buffer, it applies only if the 12-month period is immediately before or immediately after a period during which the dwelling was used as a residence. It may be used multiple times during the bright-line period. If the buffer is exceeded, the main home exclusion does not apply.

To avoid disappointment, I warn you that the IS really only comments on what is considered to be a person’s main home, who is the leading home person, and what used as a main home means. In relation to the latter, it then discusses the 12-month buffer, but neither the commentary nor the IS examples, provide any detailed illustration of how to calculate potential bright-line income, should the main home exclusion not be available for the whole bright-line period.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.

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