Bright-line testing proposed changes – What does that mean for you?
This week 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 owners 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 October 2021, and would also be phased in over 4 years for existing properties. There would be an exemption for newly built homes where interest would still be claimable.
Interest deductions on residential property income – proposed changes
Currently, when owners of residential investment property calculate their taxable income they can deduct the interest of loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay.
The Government has agreed to change the rules that allow property owners to claim interest on loans used for residential properties as an expense against their income from those properties. The Government will consult on the detail of these proposals and legislation will be introduced shortly thereafter. Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale.
Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October. Interest on loans for properties acquired 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. This means that in the 2025-26 and later income years, you will not be able to claim any interest expense as a deduction against your income.
If money is borrowed on or after 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 on or after 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021.
Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.
Bright-line test proposed changes
The bright-line test means if you sell a residential property within a set timeframe 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 new built houses. Inherited properties and those which have been the owners main home for the entire time they owned it will continue to be exempt from all bright-line tests.
Changes to the treatment of times when a property is not the owners main home
The Government is making the rules fairer around the change of use of a main home with respect to the operation of the bright-line test. Currently if 50% or more of the time that a property is held, it is occupied as a main home then it is completely exempt from taxation.
The proposal is to change it so for properties acquired after 27 March 2021 you will be taxed on the period it was not occupied as your main residence, so for example if is was your main home for 75% of the time, then 25% of the gain will be taxed.
Any residential property that has been used as the owners main home for the entire time they owned it will continue to be exempt from any bright-line test.
What does this mean for you?
It all depends on your personal situation. In general, there will be a lot less expenses you can claim against your rental or short term accommodation income, which means more tax to pay on that income. Also, if you sell your property within those timeframes above then you will pay tax on the profit made from that property.
We will bring you more information on this as the situation unfolds. In the meantime, contact us if you would to discuss your situation further.