Changes Announced Today To The Bright-Line Test and Interest Deductibility – For Residential Rental Properties
The Government has today announced changes to the bright-line test and the interest deductibility rules. In the interests of providing timely information, we offer a brief summary.
- Any residential property acquired on or after 27 March 2021 (this coming Saturday) will be subject to a 10 year bright-line test. If the property has not been used for the full time as the main family home, any gain on sale is likely to be taxable in the year that it is earned.
- If the residential property being acquired is a new-build, the bright-line test period will be 5 years. Consultation is yet to commence on the definition of a new-build.
- The normal definition for determining the date of acquisition will be amended for property that is presently under contract, but not yet settled, and not expected to be settled until after
- Short-stay accommodation such as AirBNB rentals will not be considered commercial property. The clarification in definition of residential property is being backdated to the introduction date of the original bright-line test rules.
Interest Deductibility on Residential Properties
- Interest will not be deductible on residential property acquisitions from March 27, 2021. There is an exclusion for property developers (who pay tax on the sale of the property).
- Interest on property currently owned will still be deductible, but the amount claimed will reduce over time. For the 2022 tax year, interest will be 100% deductible for the first 6 months, and 75% deductible for the balance of the year. For the 2024 tax year it will be 50% deductible, and for the 2025 tax year will be 25% deductible. No deductibility occurs from 1 April 2025.
- If an offer has been made on a property by today (23 March 2021) that cannot be withdrawn before 27 March 2021, the property will be treated as if it were acquired prior to March 27 for interest deductibility purposes. Interest will be claimable under the phase out scenario.
Some Matters to Consider
- Is there a better way to structure the ownership. Sole or joint owners could find themselves paying tax at 39% in the year that a property is sold. This could be mitigated through a trust or company structure. This could result in the bright-line test period being reset. Please consult with us if you are considering this.
- We do not yet know whether interest could be treated as a holding cost, and therefore deductible if the property is sold within the bright-line test period.
We have some serious concerns about the proposed changes, particularly those addressing the demand side. It has not gone unnoticed that Government has specifically used some emotive language, such as “closing the loophole” and “speculators”, which hasn’t been applied to investors acquiring commercial property or shares. This is a major reset, and there is no guarantee that that the sought after outcomes will be achieved, or whether there will be unintended consequences.
If you have any queries, please contact us.