Ring fencing of losses rusty barbed wire fence

Is Your Annual Tax Refund No More?

Late at night at the end of June legislation was finally passed limiting a person’s ability to offset losses from residential property investments against a person’s other income – ring fencing of losses (i.e. non-residential rental income). For a large number of mum and dad residential rental property investors this will mean the end of the annual tax refund they received based on the loss generated from their rental property.

For most people the rules are effective from 1 April 2019, so the tax refund for the year ended 31 March 2019 will be the last. Residential rental property losses can now only be used to offset against “residential rental income” earned in the year and any excess losses will be carried forward to the next income year. There is no longer the ability to offset those losses against other employment or business-related income.

The new rules apply to residential rental property, with the term being defined as “residential land”. Accordingly, farmland and land used as a business premises are excluded. There are also a number of other exemptions, including:

  • the person’s “main home”;
  • property held for resale;
  • property that is subject to the mixed-use asset rules, and
  • property provided to an employee for accommodation in connection with their employment.

The rules do permit a person’s losses from one residential rental property to be offset against profits from another residential rental property owned by the person provided the default portfolio basis is adopted.

The legislation also contains a provision to ensure that if a “residential land-rich entity” such as a company or a partnership is used to hold residential rental property, and debt is used to acquire an interest in that entity, the amount of a deduction that a taxpayer can obtain for interest expenditure is limited to the amount of rental income derived by the properties owned by the entity. A “residential land-rich entity” is defined as an entity which more than 50% of its assets by value are residential land. Even though the main home is exempted from the legislation it is caught in the calculation to determine a “residential land-rich entity”.

Please get in touch with DNA if you would like to discuss the potential impact of these rules on your income tax liability for the year ending 31 March 2020.