What to consider if you have an investment property

The phased-in approach to the tax changes around property investment will give investors time to weigh up their options, a tax expert says.

Robyn Walker a partner at Deloitte who specialises in tax, said changes to the bright-line test and the removal of the interest deduction were not a complete surprise given the speculation in media in recent months.

“But, at the same time, it is a substantial change to the tax settings as they currently exist.”

Walker said on the plus side there would be a four-year phase-in period for existing properties for the interest deduction removal which was more generous than she had expected.

That meant it would go from 100 per cent deductible to 75 per cent after a year, then 50 per cent, 25 per cent and then from April 1, 2025, there would be zero interest deductions available.

Walker said it would give people time to work out whether they could retain the property or sell it before the rules took effect.

“The inability to claim interest deductions will obviously have a cost to people. The question is, is this an additional cost beyond how the rules would currently apply with the ring-fencing of residential rentals?”

She said people would already have filed or be in the process of filing under the new ring-fencing rule which means property deductions can only be used to offset income from their residential property and deduction claims for the year cannot exceed the income earned for the property.

“That might already be having the effect of denying interest deductions potentially depending on what other costs you have got associated with the residential rental property, so your insurances, depreciation on chattels, repairs and maintenance. All those costs are deductible and then you have got interest on top of that.

If those other costs were already driving the investment into a loss position, then the interest deduction change may make little difference, she said.

Walker said for some longer-term investors the change would also be largely irrelevant.

“If you were a property investor that was able to fully equity fund your properties – you have been in the market a long time for example then this won’t make any difference, but the ring-fencing rules would have potentially made a difference.”

What are people's options?

She said people needed to pull together their spreadsheets and work out what financially made sense.

“If there isn’t enough cash coming in to actually be able to make the interest payments on the mortgage and pay all the other expenses, including there is a bunch of expenses coming up for landlords including complying with healthy homes standards.

“That will come out to a particular number and it will either make sense or not to retain the property for each individual investor. Then they will need to decide do I keep it or sell it.”

But she said those who were deciding to sell would also have to weigh up whether they would be impacted by the bright-line test.

“Obviously properties bought prior to March 27 will still be subject to the five-year rule rather than the 10-year rule. That is another thing to factor in.”

She said those within the five-year bright-line period still had the four-year phasing in of the interest denial.

“You might have got to the end of the five-year period before you feel the impacts of the lack of interest deductions.”

Walker said the other issue was deciding where else to invest.

“People will have taken the position of well, residential property is a safe, known investment.Banks will lend to me for it. What are my actual alternatives? People need a bit of time to explore the fact that if residential property investment was no longer viable for them then where else can they put their money. What can they do with it to get the returns they are after?”

She said while there would be consultation on what was actually a new build, the bright-line change and date that interest deduction was switching off from was set in stone.

“People just need to understand those new rules and figure out what it means for them personally.”

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