Tax Changes Announced on 23 March 2021

 In Unit Titles

On 23 March 2021 the government announced that it intends to extend the bright line test to 10 years for residential property except for newly built houses (‘new build’s).  The new rules will apply to property acquired on or after 27 March 2021.

For tax purposes a property is generally acquired on the date that the agreement for sale and purchase is entered into (even if it is a conditional agreement).  This is known as the date of first interest.  

The date that a property is acquired will generally determine whether the bright line test is 5 years or 10 years.  If an agreement is entered into before 27 March 2021 it will generally be subject to the 5-year rule despite settlement occurring after 27 March 2021 as the date of first interest will be prior to the enactment of the 10-year rule on 27 March 2021.

Transfers to related parties

If you intend to transfer a property to a related party, we recommend that you execute an agreement for sale and purchase before 27 March 2021 to ensure that the 5 year bright-line period applies.

New Builds

The definition of a ‘new build’ is yet to be defined but it is intended to include properties that are acquired within one year of receiving their code compliance certificate.  New builds would continue to be subject to a 5-year bright line test period for properties acquired on or after 27 March 2021.

Changes to Main Home Exemption

For properties acquired after 27 March 2021, the government intends to introduce ‘change of use rules’ that will apply to the main home exemption.  If a property switches from being the owner’s main home for more than 12 months during the ownership period, the owner will be required to pay tax on the profit from the gain in value of the property.  The tax liability is calculated based on the proportion of the profit made through the property increasing in value for the period of time that the property was not used as the owner’s main home.

We expect the main home exemption will continue to be available for trusts where the principal settlor of the trust has a main home and it is that main home that the trust is disposing of.  The principal settlor is the person who makes the most settlements on the trust by market value.

Nominations

A nomination will typically reset the bright line start date for the nominee for a purchase off the plans. If you have signed an agreement for sale and purchase of an apartment or a home to be built and you intend to nominate another person or entity, we suggest that the nomination is completed as soon as possible even if the 5 year bright line test may apply.

Interest Deductibility

In addition to the changes to the bright line test, the government has also announced changes to interest deductibility, also effective from 27 March 2021.

Interest deductions on residential investment properties acquired on or after 27 March 2021 will not be allowed from 1 October 2021.  Interest on loans for properties acquired before 27 March will generally still be able to be expensed but the amount that can be claimed will be reduced over four years until the amount that can be claimed is phased out.  The proposed changes will be implemented as follows:

Income year Percentage of interest you can claim
1 April 2020 – 31 march 2021 100%
1 April 2021 – 31 march 2022
(transitional year)
1 April 2021 to 30 September 2021 – 100%
1 October 2021 to 31 March 2022 – 75%
1 April 2022 – 31 march 2023 75%
1 April 2023 – 31 march 2024/td> 50%
1 April 2024 – 31 march 2025 25%
From 1 April 2025 onwards 0%

If you have any questions, please contact us.

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