Residential rental property tax changes

Extension of the brightline test to 10 years

The first significant change was the extension of the 5-year brightline test to 10-years for residential land acquired on or after 27 March 2021. ‘Acquired’ is generally the date the sale and purchase agreement is signed. In some circumstances the current 5-year brightline test will continue to apply instead of the new 10-year rule. Those circumstances are:

• where the property is a ‘new build’, or
• where residential land was acquired on or after 29 March 2018 and before 27 March 2021, or
• where residential land was acquired on or after 27 March 2021 following an offer made by the purchaser on 23 March 2021 or earlier, and the offer could not be revoked before 27 March 2021.

At this stage little detail is available on exactly what a ‘new build’ is, other than it is likely to include properties acquired within a year of receiving their Code of Compliance Certificate. The Government is consulting with various parties on this matter and detail is expected before October 2021.

As well as extending the brightline test to 10-years, the Government has also changed the exemptions for main homes and business premises. The previous main home exemption will continue to apply for properties which are subject to the 5-year brightline test. That is, the brightline test will not apply if the property is the person’s main home for more than 50 per cent of the brightline period, and the person has not previously used the main home exemption twice in the 2 years prior to sale.

For a property subject to the 10-year brightline test, the exemption will now only apply for the period the property is actually used as the person’s main home. There is a change of use buffer that allows for the property to be used for a continuous period of up to 12 months for other than as a main home, however, that period must be immediately before or after the person has used the property as their main home.

The business premises exemption has also been changed for short-stay accommodation properties subject to the 10-year brightline test. This change will mean properties used solely for short-stay accommodation, or properties used as the family bach and for short-stay accommodation, will not qualify for the business exemption.

Removal of interest deductibility

The second significant change is the proposal to phase out interest deductions for residential rental properties from 1 October 2021. Limited information is currently available however at this stage the proposals are:

• interest deductions on properties acquired on or after 27 March 2021 can no longer be claimed from 1 October 2021
• interest on loans for properties acquired before 27 March 2021 can still be deducted but will reduce by 25 percent each income year such that by the 2026 income year no interest can be claimed
• no interest deductions can be claimed from 1 October 2021 for new loans taken out for improvements to property acquired before 27 March 2021
• taxpayers holding property on revenue account, such as developers, can continue to claim interest deductions
• interest deductions can continue to be claimed on properties that qualify as a ‘new build’.

In summary, the extension of the brightline test to 10 years and the removal of interest deductibility are significant changes in the tax landscape of residential rental properties and will impact on the majority of landlords.