The bright-line test extension
The changes to the bright line test are documented here.
There is still a “main home exemption” to the bright line test. If you sell the property within 10 years of acquisition (or 5 years for a new build), and it was your main home for the entire time you owned it, you will not pay tax under the bright-line test on any gain in value.
However, the Government is introducing a ‘change-of-use’ rule, which will impose income tax on a proportion of the profit made through the property increasing in value, where property has moved to and from being a main home for more than 12 months. The income tax payable is calculated as follows:
It is important to note that this rule will only apply to homes subject to the new 10 year bright-line test (or 5 years for new builds acquired after 27 March 2021).
If you are using property for short-stay accommodation (where the owner does not live in the property), the bright-line test will also apply.
Interest deductions on Residential Property income
From 1 October 2021, property investors will be unable to deduct their interest costs from their taxable rental income on property that has been acquired on or after 27 March 2021.
For properties acquired before 27 March 2021, interest on loans can still be deducted; but the amount of interest deductible will be reduced by 25% over the next four income years.
This means that by the 2025-26 income year, no interest will be deductible.
If a property was acquired before 27 March 2021, and additional lending (to maintain or improve the property) is entered into on or after 27 March 2021, then the interest on the additional lending will not be deductible from 1 October 2021. This means that anyone with a floating mortgage will need to monitor their accounts closely.
Property developers and builders are not affected by this change. The rule change also does not apply to loans for non-housing business purposes.
Exception for new builds
At the present time, the extension to the bright-line test will not apply to new builds and the government is intending to consult on whether new builds acquired as a residential investment property should be exempt from non-deduction of interest.
Other rules still apply
The tax rules that apply to speculators, land developers and dealers will continue to apply irrespective of the date of acquisition.
For those who frequently buy and sell their ‘main home’, you will be unable to use this exemption if it is used twice or more over a two year period immediately before the ‘main home’ was sold.
What else is happening?
The 3.8 billion “Housing Acceleration Fund” will assist Developers with new builds, by covering the costs of vital infrastructure (such as roads and water reticulation).
Below are a list of examples that may help you understand these changes better:
The above information is of a general nature only. The information in this article in no way constitutes legal advice and you should contact your legal advisor for advice relating to your specific circumstances.