A tax expert wants the government to consider allowing some deductibility of interest payments for property investors.
The abolition of the tax break, which allowed interest payments to be offset against income, was part of the recent measures aimed at cooling the housing market.
KPMG tax partner John Cantin said tax law looked at how the money was being used and in the case of residential investment properties it had a dual-use, both for rental income and to hold the property for capital gain.
"The current rules before the change said all of the rental use is what we focus on and therefore the interest is all deductible, but when you look at how that property is being used quite clearly it's being held and some time in the future it might be sold," he said.
"There's a dual-use, so the problem that I think the government has looked at is how do you deal with that dual-use."
Cantin said the new policy assumed the property had been bought for the capital gains only - which was generally not taxable.
"Unfortunately I think their use of the loophole language has obscured that sort of policy thinking."
Instead of wiping the tax break altogether, Cantin recommended the government consider allowing 50 percent deductibility, which would more fairly account for the dual-use.
"The 100 percent non-deductibility isn't on the table for consultation as generally tax policy would be," Cantin said.
"What is on the table [are] things like how does it apply to new builds, what happens if you sell the property and the game is taxable because you're caught by the bright lines here so the next level of detail is what's being consulted on not the policy itself."
What is changing
When owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay.
The government will consult on the changes but interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021.
Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense, however the amount you can claim will be reduced over the next four income years until it is completely phased out.
This means that in 2025-26 and later income years, you will not be able to claim any interest expense as deductions against your income.
Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.