In recent times residential property investors have felt the weight of evolving tax policies and higher interest rates. However, with changes to interest deductibility and the bright-line rules in the coming financial year, there is appears to be a more favourable investment landscape ahead.  

Interest deductibility

A concern for residential property investors has been the limitations on interest deductibility. Under the previous Labour government, the ability to offset mortgage interest costs against rental income was removed, thereby increasing the tax payable by property investors to the point that many would have had tax to pay on rental income they have received in the previous financial year, even though their property was significantly cashflow negative. 

The current coalition government has announced adjustments to these regulations and from 1 April 2024, investors will be allowed to claim 80% of their mortgage interest expenses, with a full reinstatement to 100% scheduled for 1 April 2025.  

Bright-line rule

Another pivotal change is to the bright-line property rule. The bright-line rule is designed to ensure tax is paid on financial gains from property transactions within short timeframes. The coalition government has announced a reduction in the bright-line test period. Effective from 1 July 2024, the duration will be shortened from 10 years (five years for new builds) to just two years. The two year timeframe is calculated from the settlement date of the original purchase agreement to the date of the new sale and purchase agreement.

This reduction aims to distinguish genuine investors from short-term traders seeking to exploit tax loopholes: discouraging speculative activity while encouraging long-term investment in the property market. 

Reduced pressure on rent

These changes signal a more favourable landscape for property investors. While challenges such as high interest rates persist, these regulatory amendments inject optimism into the market and we anticipate it will reduce upward pressure on household rents. 

Navigating the changes

As with all tax and regulatory changes, there will be nuances to work through especially during the transition phase. We suggest getting in touch to discuss how you can optimise your investment decisions and ensure compliance.