The government has announced proposed changes for residential property acquired on or after 27 March 2021. The proposed changes include:
- extending the bright-line test to 10 years
- amending the main home exclusion which would require tax to be paid on gains made for periods the property is not used as the owner’s main home
- allowing newly built homes to use a 5 year bright-line test
- not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This would start from 1 October 2021, and would also be phased in over 4 years for existing properties. There may be an exemption for newly built homes.
The current law
Currently when owners of residential investment property calculate their taxable income they can claim as an expense the interest on loans that relate to the income from those properties. This reduces the tax they need to pay.
What is being changed
Interest deductions on residential investment property bought from 27 March 2021 will not be allowed from 1 October 2021.
Interest on loans for properties bought before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out, as shown in the table.
This means that in the 2025–26 and later income years, you will not be able to claim any interest expense as deductions against your income. If money is borrowed from 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property bought from 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021.
Extension of the bright-line test to 10 years
The bright-line test means if you sell a residential property within a set period after acquiring it you will be required to pay income tax on any profit made through the property increasing in value. The current bright-line period is 5 years.
The Government has announced it intends to extend the bright-line period to 10 years for residential property except newly built houses (new builds).
Inherited properties and those which have been the owner’s main home for the entire time they owned it will continue to be exempt from all bright-line tests.
If you sell the property more than 10 years after acquiring it (or 5 years for a new build), you will not pay tax under the bright-line test on any gain in value.
If you sell the property within 10 years of acquiring it (or 5 years for a new build), and it was your main home for the entire time you owned it, you will not pay tax under the bright-line test on any gain in value. However, if the property was your main home, but was used for other purposes for more than 12 months during the time you owned it, you must pay income tax on the profit from the gain in value of the property.
If you sell the property within 10 years of acquiring it (or 5 years for a new build), and it was never your main home for the entire time you owned it, you will pay tax under the bright-line test on any gain in value.
Any profit from a gain in property value that is considered taxable income will also affect any other obligations or entitlements you have based on taxable income, such as student loan repayments, child support payments, and Working for Families. This effect would be in the year you need to include the income on your tax return.