Understanding changes in policies and developments of new policies and initiatives can get confusing. It can be difficult to understand the complex layers in the taxation world in the first place. So, the combination of property and tax is a bit mind-blowing, isn’t it?
Let’s lay out the recent proposed changes to property tax in its ‘simplest’ form.
Firstly, the bright-line test was introduced in 2015 and is a way to ‘tax the financial gains from income made when people buy and sell a house’. The initial bright-line test of 5 years meant that if you bought a house as an investment property and planned to sell it within the 5 years, you would have to pay income tax on the financial gains. The proposed changes have extended that period to 10 years. This implies that if you sell a house within 10 years and it was NOT your main residential place, you must pay tax on the profit gained in increased property value. Now, get ready to understand what comes under the bright-line test.
Properties don’t come under the bright-line test if:
It is an inherited property.
If it was your main home (family home) the entire time of ownership.
If it was acquired before 29th March 2018.
Properties that come under the 5-year length of the bright-line test:
If it was NOT your main home but acquired before 27th March 2021.
If it was a new build when you acquired (after 27th March 2021).
Properties that come under the 10-year length of the bright-line test:
If it was acquired after 27th March 2021 and was NOT newly built when you acquired.
Phew. What a rollercoaster, am I right? Let’s go again.
The proposed legislation for interest deductions as an expense on rental income will be restricted from the 1st of October 2021. Properties bought after the 27th of March 2021 will remove investors’ ability to deduct interest as an expense from the 1st of October 2021. Properties acquired before the 27th of March 2021 will allow investors to continue deducting interest as an expense. However, the legislation has outlined a 4-year period that will reduce the amount you can claim within that timeframe and ultimately phase out the ability to deduct interest as an expense entirely (by 31st March 2025). Further, a recent discussion have confirmed that new builds will be exempted from the planned changes.
Now, what does this all even mean?
Extending the existing bright-line test and restricting interest deductions are part of the response made to influence housing affordability in favour of first home buyers. Having the 10-year bright-line test in place aims to encourage people to buy newly built homes enabling the 5-year bright-line test, but also to help discourage investment in rental properties. The changes to interest deductions intend to reduce pressure on housing prices and future homeowners. However, it does affect capital gains which may not be favourable to property investors with intentions for rental income.