Newsflash: Government Property Announcements re-write the Income Tax Act

Yesterday, the Government announced a range of measures which in their view address the supply and demand for residential properties (in addition to measures already in force such as the ring-fencing of residential rental property losses). Each of these have the potential to have a major impact on anyone who currently owns, or is considering transacting in, a residential property. The announcements do not apply to commercial properties.

The three main announcements are:

If you're currently in the middle of a residential property transaction, please urgently seek our advice without delay. 03 474 0475

For detailed information you can refer to the Government's media statement and fact sheets on the bright-line test and interest deductions. The devil will be in the detail and we are expecting further information as these changes unfold.

While there is no need to panic, it is important you know how the changes could affect your cash flow. We summarise the key points below:

1. Increase in bright-line test from five years to 10 years effective from 27th March 2021

2. Changes to the main home exemption from bright-line test

3.  Intention to remove interest deduction on residential properties

The impact in dollars and cents

How much of an existing investment property’s interest cost you can claim will start to diminish over the next four years.

Based on the scenario below, a $700,000 investment property debt at 3% interest, we estimate the approximate annual cost to be between $735 - $1,023 in year one, and between $5,880 and $8,190 by the time it has been completely phased out.  

Income
Year

Percentage of interest cost you can claim
Cash impact 28% company tax rate
Cash impact 30% personal tax rate
Cash impact 33% personal/Trust tax rate
Cash impact 39% personal tax rate
April 2021 – March 2022 (transitional year)
1 April – 30 September 100%
1 October – 31 March – 75%

$735
$787 $866 $1,023

April 2022 –March 2023

75%
$1,470
$1,575
$1,732 $2,047

April 2023 –March 2024

50%
$2,940
$3,150
$3,465
$4,095

April 2024 –March 2025

25%
$4,410
$4,725
$5,197 $6,142

April 2025 onwards
0%
$5,880
$6,300
$6,930
$8,190

Please note this scenario doesn’t consider any losses that can be carried forward from previous years and doesn’t include any measures to offset the impact, such as increasing rents. Also bear in mind that interest rates are likely to only trend in one direction – upwards! 

If you're unsure how these changes affect you or would like some clarification, please contact your usual advisor for more information. In the meantime, we will continue to keep you updated. 03 474 0475

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