Tax Talk | New Tax Bill
The Minister of Revenue recently introduced the Taxation (Annual Rates for 2021-22, GST and Remedial...
The government has announced a suite of changes intended to fix the housing market, and in particular, try to curb the significant house price increases seen over the last year.
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Key changes are:
We believe these changes will have more impact on the residential property sector than the removal of depreciation in 2011 and the introduction of the ring fencing rules in 2019 combined.
The Government plans to extend the bright-line test from 5 years to 10 years for pre-existing properties with the existing 5 year test continuing for new builds. This is proposed to come into force for properties which are contracted for sale and purchase from this Saturday (27 March 2021). Properties for which an offer had been made on or before 23 March 2021, and for which the offer cannot be withdrawn before 27 March 2021 will be treated as subject to the previous 5 year rule.
The main home exemption is being 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 will require an apportionment calculation if the property was not a main home for more than 12 months.
The Government plans to remove the ability for landlords to claim an interest deduction on residential rental properties. It is proposed the ability to claim interest deductions would be restricted from 1 October 2021, with no ability to claim an interest deduction where the property was purchased on or after 27 March 2021, and a reducing interest deduction where the property was purchased before 27 March 2021. Under the proposal, it will not be possible to claim an interest deduction on residential rental properties after the end of the 2025 tax year (31 March 2025 for standard balance dates).
The proposal would not impact on property developers, or where a loan for business use is secured against a residential property. In addition, the Government is considering whether exceptions would be made on 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 (hence the 1 October start date).
The government has also announced two non-tax measures to assist first home buyers and to boost supply. The annual income cap for first home buyers accessing government assistance is planned to increase from $85,000 (for singles) or $130,000 (for multiple buyers) to $95,000 and $150,000 respectively. The house price cap will also increase, with the specific cap depending on the location of the property and whether it is a new build or existing property. Both caps will change from 1 April 2021. A $3.8 billion Housing Acceleration Fund is being set aside, mostly to fund infrastructure to facilitate further development.
Unfortunately, the law of unintended consequences will probably have the most influence over the housing market. Previous tightening of the rules on landlords has seen shortages of rental properties emerge in provincial markets that had never previously experienced a shortage of rentals. Our expectation is that landlords would continue to exit the market, reducing the supply of available rentals and pushing up rents, causing the greatest harm to the most vulnerable.
We have several key concerns about the proposal as announced, and hope that when legislation is brought before Parliament, some of these issues are addressed:
With a 5 year bright-line test, restructuring within an economic group was already fraught with danger, as moving a property from say personal ownership to ownership in a family trust would trigger the restart of the bright-line period. This was an unfair result as ultimate economic ownership was unchanged and other tax rules generally ignore such changes. With a 10 year bright-line test, this problem is extended out.
With the myriad different building types and ways a building can be used, we are increasingly encountering boundary issues around which rules were applicable to which property. A common question which we had encountered was around whether a property used for residential and commercial purposes (say a building in a regional CBD, with ground floor retail and a first floor apartment) could have depreciation deducted under the new building depreciation rules (refer our article here). We foresee this problem getting worse, with properties let out for short term rental (e.g. Airbnb) being particularly complex. Government will need to ensure that strong definitions are used to provide some clarity to investors our experience thus far is not reassuring.
The practical impact on a landlord will be harsh. Prior to 2011, most residential rental properties had two deductions available depreciation and interest. Depreciation on residential rental properties was removed in 2011. With interest non-deductible, this will mean the full rent received from the tenant (less rates, management and repairs) will constitute taxable income, instead of only the profit being taxable (i.e. rent received less all expenses). On a property with a median rental, this might mean an increased income tax bill of over $10,000 per annum, depending on the applicable tax rate. Not a small number.
Subject to what gets decided by Parliament, it is also possible that in some situations, there would be no ability to store up interest deductions against taxable gains on sale. The economic return on residential properties over their full life will change markedly, and the only lever that landlords could change is the rent they charge. In the short-term it is renters who will suffer, and hopefully over the long-term the housing market will be more settled.
If you own any sort of property, we strongly recommend seeking advice around the tax consequences to your property of this package once the final legislation is enacted. The complexity of these rules means the risk of making unintended errors has increased significantly.
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