Is Mortgage Cashback Taxable in New Zealand? What IRD’s Latest Draft Means for Borrowers

Mortgage cashback payments are prevalent in New Zealand, particularly when borrowers refinance or transfer their loans to another bank. Many homeowners perceive cashback as merely a bank incentive without tax implications. However, the latest draft guidance from Inland Revenue, under PUB00504, suggests the matter may be more intricate, especially if the loan is associated with a rental property or another income-generating purpose.

Is Mortgage Cashback Taxable When Received?

According to the Inland Revenue Department's current draft perspective, a mortgage cashback payment is generally not taxable upon receipt. It is not considered ordinary income simply because the bank provides it to the borrower. Nevertheless, this does not imply that the cashback can always be disregarded.

Rental Property Loans Require More Attention

Most New Zealand dollar mortgages are classified as financial arrangements for tax purposes. If a loan has been utilized to generate income, such as purchasing a rental property, the cashback may need to be considered when the loan is repaid, refinanced, or otherwise concluded. At that point, a Base Price Adjustment, or BPA, might be necessary. Practically, the cashback could reduce the amount of deductible interest available in the final year. In certain cases, part of the adjustment might result in taxable income. The key point is that the tax impact might occur years after the cashback was initially received.

What About a Private Home Loan?

If the mortgage has been used solely for a private home, the practical tax impact is usually minimal. Since interest on a purely private home loan is generally not deductible, mortgage cashback will typically have little or no income tax consequence for most owner-occupiers.

Mixed-Use Properties Can Be More Complex

The situation can become more complicated if a property changes its use. For instance, a home may later become a rental property, a rental may later become the owner’s home, or part of the property may be used as a home office. In these cases, the final tax treatment may depend on how the loan and property were utilized over time.

Maintain Records of Your Cashback

Borrowers with rental properties or those who frequently refinance should maintain records of any cashback received. This should include the cashback amount, the relevant loan, refinancing documents, and records indicating how the property was used. These records may be necessary years later when the loan concludes.

Is IRD Auditing Mortgage Cashback?

Currently, the Inland Revenue Department has not announced a specific audit campaign targeting mortgage cashback. PUB00504 remains draft guidance, and the final position may change.

However, the draft clearly indicates that mortgage cashback associated with an income-earning loan should not be disregarded simply because it was not taxable when initially received.