Recent changes to legislation were enacted in March 2022. The legislation means that interest deductions on many residential properties, acquired on or after 27 March 2021, will not be allowed from 1 October 2021. Existing property investors will see the following main changes:
· Interest on loans for residential properties (including bare land zoned for residential use) acquired before 27 March 2021 can still be claimed as an expense, but the interest deductions will be phased out from 1 October 2021 as follows:
Date interest incurred | Percent of interest you can claim
Before 1 October 2021 | 100%
1 October 2021 – 31 March 2023 | 75%
1 April 2023 – 31 March 2024 | 50%
1 April 2024 – 31 March 2025 | 25%
1 April 2025 onwards | 0%
· If money is borrowed on, or after, 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be immediately non-deductible from 1 October 2021 rather than subject to the phase out rule. There are some transitional rules to allow refinancing of borrowing (and certain other transactions) without forfeiting interest deductions.
· Interest which is incurred in relation to non-residential property purposes will remain deductible (for example, a builder draws down a loan against a residential property in order to buy a new business van).
· Transitional rules exist to help taxpayers apportion borrowing which has mixed purposes (e.g. a loan used to purchase a building used partly for business purposes, partly for personal).
· An exclusion from the interest denial rules applies to “new builds”. A “new build” is a self-contained dwelling which has received a code of compliance certificate (CCC) on or after 27 March 2020 (a year earlier than originally proposed). Owners of new builds will be able to claim interest deductions for 20 years from the date of the CCC (this includes the original owner and any subsequent owners if the property is sold).
· Property developers should not be affected by these changes and will still be able to claim interest as an expense.
· If a taxpayer has been denied interest deductions but is subsequently taxable on the proceeds when the property is sold (for example it is sold within the bright-line period), the taxpayer will be able to claim interest deductions up to the amount of the taxable gain on sale.
What are the main changes in respect of the bright-line test?
· Earlier this year the bright-line test was extended to apply for 10 years. This legislation will reduce the bright-line test to five years for “new builds”. This amendment will be backdated to 27 March 2021. For the purposes of this rule, a “new build” is a property acquired on or after 27 March 2021 which has been acquired within 12 months of receiving its CCC.
· The bright-line test has had many changes in length since it was first introduced and the below table summarises which rule applies based on the property acquisition date:
|When the property was acquired||The bright-line period that applies|
On or after 27 March 2021, unless the property is a "new build"
|Between 29 March 2018 and 26 March 2021 (inclusive) for properties which are not "new builds"/ On or after 27 March 2021 for properties which are "new builds"||5 years|
Between 1 October 2015 and 28 March 2018 (inclusive)