With significant increase in house prices over the last year, Government has announced a number of changes to combat this. The key changes are:
- Removing interest deductions for residential rentals
- Extending the Bright-Line Test from 5 years to 10 years, and other changes for the main home exemption.
- Investing $3.8 billion into housing acceleration funds
- Loosening income and price caps for first time buyers who plan on utilizing government assistance programs
We expect these changes to have a greater impact on the residential property sector than the removal of depreciation in 2011 year and the ring fencing of tax losses rules in 2019 year combined.
Removal of interest deductibility
Starting from 1 October 2021, the government proposes to remove interest deductibility on residential rental properties acquired on or after 27 March 2021. Residential rental properties acquired prior to 27 March 2021 are still entitled to interest deductions but at a reduced rate year on year until it is 0% from 31 March 2025 (for default balance date). This means landlords will not be able to claim interest deductions on residential rental properties after 31 March 2025.
The proposal would not impact the property developers or where a business loan is secured against a residential property.
Bright Line Test
The government proposes to extend the bright line test from 5 years to 10 years for pre-existing properties with the exclusion of new builds which can still apply the 5 year bright line period. It is proposed to be effective for properties which are contracted for sales and purchase from 27 March 2021.
Main home exemption is modified with effect from 27 March 2021. The exemption applies where a house has been used for more than 50% of the time as a main home. The new rule requires an apportionment calculation where the property was not a main home for more than 12 months.
Further, the Government is considering whether exceptions should be made for new builds acquired as a residential rental property and properties subject to the bright line test, along with other details. These are being worked on now and will only be available later this year in Bill form.
In addition to these two changes, there are also two new non-tax measures being put into practice that will help first home buyers while also boosting supply. First, the income cap for first home buyers will increase from $85,000 to $95,000 for single buyers and from $130,000 to $150,000 where there are multiple buyers.
The cap on house prices will also increase depending on location and whether or not it is an existing property or a brand new building project. Both of these changes will be effective from 1 April 2021.
The second new program is a $3.8 billion Housing Acceleration Fund. The purpose is to facilitate further development and fund new infrastructure.
Unfortunately, tax rule changes and tightened mortgage lending have resulted in a shortage of rentals. For landlords who are excessively geared may leave the market due to these tax changes which may put further pressure on rent levels. Based on recent news, Government will consider addressing rental hikes if it happens.
If you decide to restructure, additional consideration shall be made for change of property ownership within the same economic group. Under current law, say a move from personal name to a new family trust would trigger a restart of the bright line period for another 5 years. This results in an unfair outcome as the ultimate economic ownership is unchanged and other tax rules generally ignore such changes. With an extended 10 year bright line test, this problem is extended.
The practical impact on residential landlords may be harsh, subject to level of mortgage for the landlords. For instance, for a property with a median rental, this might mean an increased income tax bill of over $10,000 per year, depending on the applicable tax rate. Residential property investors shall consider the impact and factor in the cost from these tax changes before deciding to proceed with a property purchase after 27 March 2021.
If you own a residential property, it is strongly recommend to seek advice on the tax consequences from these tax changes to your property portfolio once the final legislation is enacted. The added complexity of these rules to the current law means it may create higher risk of unintended errors.
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