The Government have announced a range of measures addressing the supply and demand for residential properties.
 
The three main announcements are:

• Increase to the bright line test from 5 years to 10 years effective from 27 March 2021
• Changes to the treatment of times when a property is not the owner's main home 
• Intention to remove interest deduction on residential properties from 1 October 2021

 
For more information see the Government's media statement and fact sheets on the bright-line test and interest deductions.
 
We summarise key points below.

1) Increase in bright-line test from five years to 10 years effective from 27 March 2021

• The Government has announced it intends to extend the bright-line period to 10 years for residential property except newly built houses (new builds). 
• The 10 year rule will apply for properties purchased from 27 March 2021. 
• Legislation to define 'new builds' and exclude them from the proposed 10 year test is intended to be introduced into Parliament after consultation. The Government intends for the legislation to be retrospective such that new builds acquired on or after 27 March 2021 would continue to be subject to a five year bright-line test.
• Inherited properties and those which have been the owner's main home for the entire time they owned it will continue to be exempt from all bright-line tests 

Fact Sheet: Bright-line Test
 
2) Changes to the treatment of times when a property is not the owner's main home: 

• The Government is making the rules fairer around the change of use of a main home with respect to the operation of the bright-line test.
• Any residential property that has been used as the owner's main home for the entire time they owned it will continue to be exempt from any bright-line test. 
• For residential properties acquired on or after 27 March 2021, including new builds, the Government intends to introduce a 'change-of-use' rule. This will affect the way tax is calculated if the property was not used as the owner's main home for more than 12 months at a time within the applicable bright-line period. 

Fact Sheet: Bright-line Test
 
3) Intention to remove interest deduction on residential properties 

• The Government will undertake consultation on this before introducing legislation for this, with application from 1 October 2021.
• At this stage they are planning:
  • Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021.
  • Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out.
  • If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021. 
  • Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.
  • Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale.

Fact Sheet: Interest Deductions on Residential Property Income
 
If you are unsure how these changes affect you or would like some clarification, please contact us on 06 876 8124 for more information. In the meantime, we will continue to keep you updated.
 
Article kindly supplied by Susan Robertson, Director, PKF Kendons