Over the last few years, the Government has changed multiple property tax rules to try to lower house prices and assist first-home buyers.

The current Coalition Government has now reversed most of these changes to assist landlords and potential investors. We outline these changes below.

Interest Deductibility

The rental property interest deductions, introduced by the Labour Government, are being phased out by the Coalition Government. The table below shows the level of claim a person is entitled to from 1 April 2023:

While interest is being phased back in, exclusions to the above rules will still apply to land dealers and property developers. This change simplifies the completion of tax returns and will mean the amount of tax paid by debt-leveraged residential property owners will be lower.

Bright-Line Test

The 5 & 10 Year Test Reverts Back to 2 Years.

Starting from 1 July 2024, the 10- and 5-year bright-line tests will be discontinued. Instead, the Government has reinstated the original two-year test for sale and purchase agreements signed on or after this date.

From 1 July 2024, the key consideration when disposing of residential land is whether more than two years have passed from the date of land purchase settlement to the date of entering into a sale agreement.

Main Home Exclusion Simplified

Effective from 1 July 2024, the main home exclusion undergoes simplification. Rather than apportioning dwelling use between the main home and rental purposes—resulting in partial taxable gains—the exclusion now applies on an all-or-nothing basis.

To qualify, the property must have been used as the owner's main home for more than 50% of the time and occupy more than 50% of the property's area. If it meets these criteria, all gains from its sale are tax-free; otherwise, the entire gain is taxable. Additionally, the main home exemption excludes the construction period of the main home.

For example: Raj owns a bare section with a bright-line start date of 17 May 2023. The section remains vacant for three months while Raj decides its use. He decides to build a home, taking 13 months for planning, consent, construction, and compliance certification. Raj then resides in the property for six months before selling it on 1 January 2025. The 13-month construction period is ignored, making the property Raj's main home for 67% of the time (6 months out of 9 months), exempting all gains from tax upon sale.

Selling to an Associated Person? You May Not Face Tax Issues Anymore.

The Government has introduced new roll-over relief rules to exempt certain associated person transactions from bright-line rules. This change addresses issues where parents were taxed when transferring properties purchased for their children.

Under roll-over relief, specified residential land transactions are tax-exempt at the time of transfer. The purchaser adopts the vendor’s purchase price and bright-line start date.

From 1 July 2024, roll-over relief applies to:

• All transfers between associated persons who have been associated for at least two years before the transfer;
• Transfers to trusts where all beneficiaries have been associated with the vendor for at least two years (excluding infants under two years and those associated through recent marriages or adoptions), or charities.

However, roll-over relief can only be applied to a property once every two years.

These property changes, marking a return to past practices, simplify tax rules for property owners and enhance financial viability for property investments. For further enquiries on this topic, please contact us.

For more information about the first budget of the new Coalition Government's Budget 2024 and what's in it for you, read here