A Week in Review at Gilligan Sheppard

New interest deduction rules – still only a proposal 

Due to the nature of a number of enquiries I have experienced over the past couple of weeks since the Government made its announcement that it was proposing to make changes to the interest deduction rules associated with d, I thought it was timely to remind you all that the proposed changes are still just that – a proposed change that has not been legislated for, and there will be a public consultation process completed, prior to draft legislation being released.

So once again the message to investment property owners is do not panic. Sure, appreciate the potential effect a rule change may have on your financial position, as any prudent investor should do, however, let’s at least see the draft legislation post the completion of the consultation period, before any firm decisions are made.

Therefore, a few things to consider, remember that this is just what is proposed, not a finalised position:

1. Lesson number one – Nothing changes until at least October 1^st, 2021. Until this date, all interest costs remain fully deductible.
2. Lesson number two – Post 1^st October 2021, your entitlement to interest deductions will depend on when you acquired your residential investment property (acquired being the date you entered into a binding agreement to acquire the land – not the settlement date) – was this date pre or post 27^th March 2021.
3. Lesson number three –If the date you acquired the land was post 27^th March 2021, then effective 1^st October 2021, your interest costs will no longer be deductible.
4. Lesson number four – If the date you acquired the land was pre-27th March 2021, then you are still going to have some quantum of interest deduction through until at least 1^st April 2025 (your claim entitlement will reduce by 25% each year).
5. Lesson number five – If the date you acquired the land was pre-27th March 2021, but you have taken out new borrowings post 27^th March 2021 (say to complete improvements to the land), the interest on the new debt will be non-deductible post October 1^st, 2021.
6. Lesson number six – If you are likely to pay income tax on any eventual disposal gain, it is likely you will still get to claim your interest deductions – either under existing rules (property developers) or in one lump sum (bright-line taxation for example).
7. Lesson number seven – Those who invest in ‘new builds’ are unlikely to be impacted by the new rules. Many questions remain unanswered here however, including what will be considered a ‘new build’ – what if I buy bare land and construct a new dwelling to rent out – what if I buy an existing dwelling and plan to demolish and replace with a greater number of new builds to rent out, etc.

Lesson number eight – Don’t be surprised to see a raft of anti-avoidance rules to prevent you from structuring in such a way to avoid the new rules – just like we saw with the introduction of the residential rental deduction ring-fencing rules.