April 2021

10-year Bright-Line Test and Closing of Interest Deductibility


In late March, the Government announced changes to its housing policy in an attempt to cool the housing market by discouraging property investors and stimulating housing supply. A summary of the disincentives are as follows:

1.                   The bright-line test: This rule imposes an income tax on the capital gain made on a property if re-sale occurs within a certain time period. This time period was previously 5 years, but the new rule now applies if a property is sold within 10 years of acquisition.

2.                   Interest deducibility rules: The Government is phasing out the ability of property investors to claim interest on loans for residential properties as an expense against their income. The current proposal is scheduled to apply from 1 October 2021. For properties acquired prior to 27 March 2021, the amount of interest claimable will be phased out over the next 4 years. If the property was acquired on or after 27 March 2021, then the interest cannot be claimed as an expense.

When is a property “acquired” for the purposes of the new rules?

The “new” bright-line test applies to properties acquired on or after 27 March 2021. A property will be treated as acquired before 27 March 2021, and therefore under the old rules, if the Agreement for Sale and Purchase was entered into on or before 23 March 2021 and could not be withdrawn before 27 March 2021. Depending on the conditions, some Agreements which were still conditional as at 27 March 2021 will fall under the old rules. This same test is likely to apply to the proposed change to the interest deducibility rules when they come into effect.

Government still considering applicability of rules to newly built homes

The Government has indicated that new builds will continue to be subject to the 5-year bright-line period. In addition, the current proposed changes to the interest deducibility rules may exclude new builds, meaning that interest would still be claimable as an expense on loans for new builds. The Government has indicated that it intends to consult on what a “new build” is before giving effect to these exceptions. 

Email Mark on the link below or phone (03) 375 5406 for more information.