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Bright-line and Interest Deduction Update

AUTHOR: Matthew Gilligan

POSTED: 15 March 2024

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One 14 March 2024, the government released draft legislation coming good on its promise to reduce the bright-line period to two years and repeal the interest limitation rules.

The highlights are as follows:

Bright-line

A two-year bright-line period will apply to all property where sale occurs on or after 1 July 2024. The date that you enter into the agreement to sell is the key. For example, if you bought a property in March 2022 that is currently subject to a 10-year bright-line period, you would be taxable on any gain if you enter into an agreement to sell it now or any time before 1 July 2024 - even if settlement is after this date.

On the other hand, if you enter into the agreement to sell on or after 1 July 2024, any gain will not be taxable if at the date of entry into that agreement two years have passed since the start of the bright-line period, i.e. not taxable on sale post 1 July 2024 if the property purchase settled before 1 July 2022.
The main home rule is reverting to its previous form which focuses on whether or not most of the property is used for most of the bright-line period as your home. This is an “all or nothing” test, meaning either you satisfy these conditions, and sale within two years is exempt, or you do not.
“Rollover relief” rules for the bright-line rule are being expanded. At present there is a limited number of restructures that qualify for rollover relief. For example, a residential property can be transferred to or from a trust, or to and from an LTC, and get the benefit of rollover relief. On the other hand, a transfer to or from an “ordinary” company does not qualify for rollover relief. Under the new rules, rollover relief will apply if there is “association” between the two parties, which will allow for a wider range of restructures to qualify.

Interest deductibility

Interest costs will be fully deductible on all property from the 2025/26 income year (which for most taxpayers is from 1 April 2025). For the 2024/2025 year, interest will be 80% deductible in relation to all property - unless you are already entitled to 100% interest deductibility due to the property being a new build or rented out as social housing. Needless to say, this is a positive development.

Depreciation

On a negative note, depreciation deductions that were restored for commercial buildings in 2020, are being removed again. No depreciation will be able to be claimed in relation to commercial buildings from the 24/25 year (for most taxpayers from 1 April 2024).

The above is a summary of where things stand at the moment. We are still working through the draft legislation in detail and would not be surprised if there are issues with the drafting due to the haste with which it has been produced.

The observations above reflect the intention of the new legislation per the accompanying commentary. Hopefully the finalised form of the legislation accurately reflects that, but we will be keeping an eye on it and will post any updates as they come to hand.

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Matthew Gilligan
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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