Property investors face end of some tax breaks

If you’re a property investor, there are several recent changes to the tax system that may affect your bottom line.

Traditionally, property investors have been able to deduct interest expenditure for residential rental property from their taxable income.

Last year, the government proposed limiting the deductibility of interest expenses for property investors.

It was one of a number of measures aimed at discouraging investors from buying existing homes (as opposed to new homes) and improving housing affordability.

This proposal became law on 31 March, limiting the ability to claim tax deductions for interest expenses incurred since 1 October last year (subject to some exceptions – see below).

The extent to which you may be affected depends on whether you bought your investment property on or after 27 March last year.

If you bought your investment property on or after this date, deductions for the cost of interest are no longer allowed.

Those who bought before 27 March last year have been given some leniency.

Interest deductions on their borrowings are being progressively phased out during a backdated transition beginning 1 October 2021. No interest deductions on these properties will be allowed from 31 March 2025.

Investors will need to review their funds to make sure they did not receive deductions on interest charged on borrowings used to earn income.

Yet not all property investors will feel this pinch at tax time.

The government wants to increase housing supply to improve affordability, so will exempt new housing and allow interest deductions in full.

This may benefit investors buying land, developing or subdividing, building, and those renovating or maintaining.

One of the more notable examples of this sort is called the new build exemption.

Under this rule, an investor who buys land with a new home on it and allows the home to be rented is allowed interest deductions for 20 years.

Any subsequent buyer of the property is also entitled to interest deductions within the initial 20-year period.

KPMG Partner - Tax, Darshana Elwela, said the changes for property investors were significant.

Mr Elwela said there was an argument that interest should not be deductible if used for non-taxable income.

Yet he conceded law makers had decided not to allow for nuances.

“The government has landed on a default 100 per cent deduction denial,” he said.

This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.