The Government announced its new housing policies on 23 March 2021 in a bid to put the brakes on a rampant property market. These announcements include some significant tax changes.
Any residential investment property where a binding sale or purchase agreement is entered into, on or after 27 March 2021 will be subject to a new bright-line test. The bright-line period has been extended from five years to ten years. This does not apply to “new-builds” which will only have a five year bright-line, however the Government is yet to define clearly the definition of “new builds”. This is likely to come later in 2021.
These means that the bright-line periods are now:
2 years – properties purchased between 1 October 2015 – 28 March 2018
5 years –properties purchased between 28 March 2018 – 26 March 2021
10 years – properties purchased after 27 March 2021
The main home exemption has also been amended and any residential investment properties acquired on or after 27 March 2021 will have a new change in use rule applied. This means that if a residential property is used as a main home for six out of eight years, 25% of the gain on sale in year 8 will be taxable. This will apply to existing and new build properties.
The second major change for investors is the removal of a tax deduction of interest paid on property loans. For all properties acquired after 27 March 2021 there will be a phase out of deductibility of interest for all existing investment properties. The government is yet to confirm how this will effect new residential rental builds, but interest deductibility does not change for developer and builders or any commercial investment property.
Here is how interest deductibility will work:
Income year % of Interest claimable
1 April 2020 – 31 March 2021 100%
1 April 2021 – 31 March 2022 1 April 2021 – 30 September 2021 100%
1 April 2021 – 31 March 2022 1 October 2021 – 31 March 2022 75%
1 April 2022 – 31 March 2023 75%
1 April 2023 – 31 March 2024 50%
1 April 2024 – 31 March 2025 25%
1 April 2025 onwards 0%
This change in policy is intended to dampen investor demand for residential properties. At the time of writing it appears that there is currently much lower interest in residential properties as a type of investment – so maybe this change has worked – or maybe the market was going to quieten down anyway.