Tax changes for property investors

Wednesday 30 March, 2022

In March 2021, the Government announced new rules for property investors, including increasing the bright-line test to 10 years and removing interest deductibility on investment properties. The reason for the changes was to reduce investor demand for existing residential property, to make it easier for first-home buyers to buy a house.

On 30 March 2022, the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act received Royal Assent. The Act makes changes to interest deductibility for property investors and changes the bright-line test for new builds.

Interest changes

From 1 October 2021, investors have been unable to deduct mortgage interest from the rental income for residential properties settled after 27 March 2021. For properties acquired before 27 March 2021, the amount of interest that can be offset against rental income is gradually reducing. On 1 October 2021, this reduced to 75% of interest costs, further reducing to 50% from 1 April 2023, 25% from 1 April 2024, and finally resulting in no interest deductions by 2025. If investors borrowed money after 27 March 2021 to maintain or improve property acquired before 27 March 2021, the interest was not deductible from 1 October 2021 onwards; there is no gradual phase out.

However, if investors sell property which is subject to the brightline rule, they can deduct interest on borrowings against capital gains.

New builds

Land businesses, property development, and new builds are exempt from the new interest rules. Investors can deduct interest for new builds for 20 years from the date that the property obtains its code of compliance certificate. New builds are residential properties which obtain their code of compliance certificate from 27 March 2020. New builds will also be subject to a five-year brightline test, meaning that if an investor sells a new build within five years of purchase, any capital gain on the sale will be taxable. 

Limited exemptions to changes in ownership

The new Act also introduces limited exemptions to the brightline test for when ownership of the property changes, but the economic ownership has not changed or is materially the same as before. This includes changes in trustees or changes in how properties are held by co-owners.

Conclusion

These changes form part of a raft of changes that the current Government has introduced to try and increase housing stock, alleviate the current housing crises, and make it easier for first-home buyers to buy a house. The changes to interest deductibility and the brightline test mark a significant change for property investors.

If you have any questions about these changes, our property experts can help.