Tax changes on investment properties
Yesterday, the Government announced a range of measures designed to address supply and demand in the housing market, including a number of tax changes. In a significant departure from previous practice some of these tax changes were announced as having almost immediate effect, including:
- The extension of the “brightline” period for non-new build property to 10 years for property acquired on or after 27 March 2021; and
- New change in use rules for property acquired on or after 27 March 2021 that is not used exclusively as a “main home” during the relevant brightline period (imposing a proportional tax on sale to reflect the time not used as a main home, if the non-main home use is for a 12 month period or longer at any time during the brightline period).
Additional measures to deny deductions for interest on residential investment property-related loans have also been signalled. The Government has indicated that it will enter into public consultation regarding these additional measures however has indicated that if legislation is passed these are intended to be effective from 1 October 2021, with retrospective application to 27 March 2021:
- Removal of interest deductibility for properties acquired on or after 27 March 2021
- Removal of interest deductibility for funds borrowed on or after 27 March 2021 to improve or maintain property acquired before 27 March 2021.
Existing interest deductions for residential properties acquired before 27 March 2021 are also intended to be phased out over the next four years.
The changes (particularly the immediate effect of the change to the brightline rules) have caused considerable concern, and clients who have already entered into or are proposing to enter into agreements to acquire residential investment property are understandably anxious to know which rules will apply to their own situation. A brief summary of the rules that determine the acquisition date for land is set out below.
Property is generally treated as being acquired on the date a binding agreement is signed (even if some conditions such as finance, or a building report are not satisfied until a later date). Agreements that are entered into by both parties prior to 27 March 2021 should therefore remain subject to the old five year brightline period regardless of when any conditions are satisfied.
There has been some uncertainty and confusion as to whether property acquired under agreements entered into by both parties over the next two days (i.e., before 27 March 2021) will qualify as having been acquired before 27 March 2021 where the purchaser had not signed a binding offer to purchase by yesterday evening. This uncertainty has largely been created by the inclusion of a “concession” in the new brightline rules (discussed further below).
While not beyond all doubt, we are of the view that the concession does not displace the usual acquisition date rule set out above. If parties both sign an agreement to purchase between today and Friday close of business, the property purchased should therefore remain subject to the old brightline rules.
Acquisition date concession
The concession applies if the purchaser made an offer to purchase on or before 23 March 2021 that was irrevocable before 27 March 2021, and the property is acquired on or after 27 March 2021. An example given of an “irrevocable offer” is an offer made in a tender process:
“Purchaser submits offer as part of tender process that closes on 22 March 2021. The tender document states that the offer cannot be withdrawn until 28 March 2021. Seller accepts offer on 27 March 2021 and ASAP is [then] signed.”
In the above circumstances it is intended that the property will be treated as being subject to the old five year brightline period notwithstanding that the parties both signed the agreement on or after 27 March 2021.
We are monitoring the situation and will send out further updates as appropriate. If you have any questions regarding your specific situation we encourage you to contact your usual Duncan Cotterill advisor.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.