More tax changes coming for residential property owners

By Susan Wynne & Jordyn Coxhead

Do you own a residential property? The tax rules are set to change again, this time in your favour.

As part of the “mini-budget” released on 20 December 2023, Minister of Finance, Hon Nicola Willis, announced two tax changes relevant to property owners, bringing into effect promises made by National and ACT in their election campaigns. Despite the announcements, legislation has not yet been introduced into Parliament and therefore details are still subject to change.

Bright-line test changes

A previous National Government introduced the original bright-line test as a two-year rule that applied to certain residential property purchased from 1 October 2015. The bright-line test was subsequently extended by the Labour Government to five and then ten years. As promised in the National Party’s Election Tax Plan, the Government has confirmed that the bright-line test will be restored to two years, effective from 1 July 2024. 

Our expectation is the proposed change should mean that residential properties sold on or after 1 July 2024 will only be subject to income tax under the bright-line test if owned for less than two years at the date of sale.

The effective date of 1 July 2024 may seem odd, but it is likely based on the Government’s fiscal year.

The changes are expected to be included added to the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (Annual Rates Bill) currently being considered by the Finance and Expenditure Committee.  This leaves some uncertainty around the specifics of the changes, for example, if it will apply to all disposals post-1 July 2024 and whether the application will be based on the date of sale and purchase agreements (as has been the case for previous bright-line changes) or if it could be based on settlement date when title typically changes in a standard sale and purchase of residential property. When it comes to bright-line tests it is important to ensure everyone understands what the bright-line start and end dates are to avoid a technical mistake.

What is the bright-line test?

Where residential land is sold and is not taxable under any other tax rules the bright line test can tax any gain on sale where a residential property is acquired and sold within a specified timeframe.

Currently, the bright-line period is set at 10 years for properties acquired since 27 March 2021 or 5 years if the property can be classified as a new build or was acquired between 29 March 2018 to 26 March 2021.

There are various exceptions to the bright-line test, with the most commonly used being the main home exemption. The Government has not indicated whether there will be any changes to these exceptions and how they might apply to the new bright-line test.

Interest deductibility on residential rental properties

Also announced in the mini-budget was the complete restoration of interest deductibility on residential rental properties. Currently, the interest on loans for many residential rental properties is either fully non-deductible or is being phased out for existing debt when the rules were changed.

According to the Finance Minister, the phasing back in of these deductions is to be determined early this year. Based on the National-ACT Coalition Agreement the allowed percentages of interest could be as follows, but the exact changes are still to be confirmed.

• 2023/2024 tax year (current tax year) – 60% deductible 
• 2024/2025 tax year – 80% deductible
• 2025/2026 tax year – 100% deductible

This will help residential rental property owners who will once again be able to access tax deductions to reduce tax year on year, particularly as the cost of lending in relation to properties continues to rise. It is worth noting that there have been no announcements on the ring-fencing rules (residential property deduction rules) for residential rental properties, so these are expected to continue in place and limit the total amount of deductions that can be claimed.

The property tax rules are complex and with the changes not yet being fully known, there is uncertainty.  For tailored advice for your specific situation, as these changes are enacted, we encourage you to reach out to your regular Deloitte advisor.