Shake up of finance and tax legislation: What’s in store for property buyers

Proposed and confirmed changes to finance and tax legislation are set to change the landscape for property buyers. So, what’s in store?

1. Prescriptive lending requirements to ease for low-risk lenders

One Act under review is the Credit Contracts and Consumer Finance Act (CCCFA), which underwent changes in late 2021 that placed additional requirements on lenders to verify that borrowers could afford a loan.

Under the legislation – which made the directors and senior managers of banks and other lenders personally liable for exercising due diligence under the Act – the lender must ensure there is a reasonable surplus in a borrower’s budget, including reasonable buffers. It also meant borrowers had to provide more detail around their spending, as well as their income. However many potential borrowers complained the line by line scrutiny of their spending did not represent their ability to service a mortgage. The legislation was cited as one reason for a significant drop in mortgage activity.

What’s changing?

Although the law was subsequently tweaked, in January this year the Commerce and Consumer Affairs Minister Andrew Bayly said he planned to remove prescriptive affordability requirements for lower-risk lending “as a matter of priority” and undertake a more substantive review of the CCCFA, which will include reviewing its penalty and disclosure regime. 

2. Interest Deductibility back on the table

Prior to 2021, rental property owners were able to able to deduct interest costs on their mortgages against their rental income for tax purposes. However in October 2021, the “Property Interest Limitation Rule” was introduced.

This means that for residential rental property acquired on or after 27 March 2021, interest cannot be claimed (unless an exclusion or exemption applies). For rental properties acquired before that date, the ability to deduct interest is being phased out between 1 October 2021 and 31 March 2025.  

What’s changing?

The new Government has committed to fully restoring interest deductibility for rental properties.

At the Government’s half-year economic and fiscal update in December Finance Minister Nicola Willis confirmed the intention to increase interest deductibility for rental properties from April 2024 – further details will be confirmed.

UPDATE: On March 10, the Government confirmed that landlords will be able to claim 80% of their interest expenses from April 1 2024, and 100% from April 1 2025. 

3. Bright-line Test heading back to two years

The Bright-line Property Rule  (also known as The Bright-line Test) was originally introduced in 2015. The tax rule looks at the length of time a property is owned to determine whether the owner may have to pay income tax on any gain in the sale. The rule does not apply if the property is your main home. 

Currently for a residential property acquired on or after 27 March 2021, a sale within 10 years will result in the rule being applied (or within 5 years for new builds). (Click here for details of the rule for properties purchased within other time periods).

What’s changing?

In December Finance Minister Nicola Willis announced that effective July 1, the bright-line period will be brought back to two years. This means that properties sold after 1 July 2024 will only be subject to the rule if owned for less than two years.

Research by Valocity found that more than 98% of the second home purchases made in 2019 and 2020 had gained in value, and would be liable for tax under the current bright-line rule.

To sum up:

While we can’t tell you where the property market might be headed, we can say with absolute certainty that buying or selling ANY property requires thorough due diligence.

This includes talking to both your accountant and lawyer to fully understand the tax implications and legislation that applies to your situation, and the property you want to buy. And if the property market does start moving faster, it’s highly recommended to be in touch with these professional advisors as soon as possible in the process.

Are you considering a property investment?

Our team have a huge amount of experience helping new buyers and seasoned pros navigate the legal side of buying, selling and developing property. Whether it’s your first home or an investment, we’re here to take the stress out of buying and selling by providing clear, practical advice and breaking legal processes down into easy-to-follow steps.

We can help you understand any legal aspects of the property you are about to buy, ensure any clauses in the sale and purchase agreement are clear, and – if you’re ready to buy - make the settlement process run as efficiently as possible.

If you’re thinking seriously about a property, it’s never too early to contact us.