The Government has announced its plans to make the housing marketing more accessible for first home buyers. One key change is the proposed removal of deductions for interest on residential rental properties. The rules will apply to all investment properties other than potentially new builds. These rules have not yet been finalised and the Government will consult on the detail of these proposals, and legislation will be introduced shortly thereafter.
Currently rental property owners can claim the interest paid on loans relating to those rental properties as an expense, thereby reducing their tax, but new legislation restricting interest deductions will apply from 1st October 2021. The changes will now mean that interest deductions will not be permitted for residential investment properties purchased on or after 27th March 2021. Although interest on loans for properties purchased before 27th March 2021 is still deductible, it will be on a reducing basis over the next four years until it is completely phased out by the 2025/26 income year.
The new legislation will not affect property developers, or business loans secured against a residential property.
There is no change to the rules regarding claiming expenses such as rates, insurance, repairs and maintenance.
Claiming Interest On Properties Purchased Before 27th March 2021
Interest on properties purchased before 27th March 2021 would still be claimed on a reducing basis over the next four years.
For example, if you purchased a rental property in 2017 and pay $1,250 in interest each month ($15,000 annually), then the proposed change will affect your interest deductions like this:
| Income Year | Amount of $15,000 Annual Interest You Can Claim |
|---|---|
| 1 April 2020 – 31 March 2021 | 100% = $15,000 |
| 1 April 2021 – 31 March 2022 (transitional year) |
1 April 2021 – 30 September 2021 = 100% of 6 months = $7,500 1 October 2021 – 31 March 2022 = 75% of 6 months = $5,625 to a total of $13,125 |
| 1 April 2022 – 31 March 2023 | 75% = $11,250 |
| 1 April 2023 – 31 March 2024 | 50% = $7,500 |
| 1 April 2024 – 31 March 2025 | 25% = $3,750 |
| From 1 April 2025 onwards | 0% |
Claiming Interest On Properties Purchased on or After 27th March 2021
Interest on properties purchased on or after 27th March 2021 would still be claimable in the 2021 tax year for the remainder of the year ending 31 March 2021. Furthermore, interest would also remain deductible for the 2022 tax year, for the period 1 April 2021 to 30 September 2021. Thereafter the interest would no longer be deductible.