What the new legislations means
From 1 April 2019 residential rental property losses have become ring-fenced. This means you can no longer claim your residential rental property losses against your other income. The ring-fenced rental losses are carried forward and can be used to offset only future residential rental property profits.
The new legislation gives you the opportunity to elect whether you hold your property on a portfolio basis or a property-by-property basis. If you don’t make an election you are by default added on the portfolio basis.
Existing residential rental property owners must elect this in the income tax return for the 2019/20 income tax year (i.e. the first income tax return that is affected by the new rules).
Taxable on sale?
Ring-fencing rules have several exclusions and caveats that may benefit you. The most likely to be utilised is the exclusion for land that would be taxable on sale.
If land will be taxable on sale (meaning it can’t be taxed contingent on selling within the five year bright-line period for example) the ring-fencing rules will not apply to that particular property. However, if the reason that property will be taxable on sale is for any reason other than the fact you are dealing in land, a notification to the Commissioner must be made.
Taxpayers must notify the Commissioner that the property is held on revenue account (i.e. always taxable on sale) within specified time periods, depending on when the property was purchased and/or when the property became revenue account property.
For land that was held at 1 April 2019 (i.e. most taxpayers with existing rental properties) this election must be made by the date for filing the 2019/20 income tax return, which is 7 July 2020 for those without tax agents or 31 March 2021 for those with a tax agent.
Have you thought of…?
- While the new rules refer to the ‘ring-fencing’ of rental property losses, the rules actually operate to stop a loss being created. The legislation limits a taxpayer’s deductions in an income tax year to the extent of the taxable income that arises from a residential rental property owned by the taxpayer.
- While the rules do technically operate to prevent losses occurring, a specific provision within the new rules applies to treat carried-forward quarantined expenses as losses for the purposes of the tax continuity provisions. As such, if your residential rental property is in a company and some expenditure has been quarantined we suggest considering these rules before any shares in the company are sold.
- The rules can become tricky if you own properties in more than one way – eg, your own name, via companies, or other entity types.
- Where an entity is interposed between a taxpayer and a residential rental property (for example using a company to hold the property) and the taxpayer has borrowed money to acquire the interest in that entity, that taxpayer’s deduction for interest costs will be limited to the residential rental property income of that entity. We note that this rule only applies to ‘residential land-rich entities’.
- The provisional tax rules may now apply to certain taxpayers who previously used rental property losses to reduce their income tax liability. If your residual income tax liability without rental property losses could be higher than $2,500, you should consider your provisional tax obligations, and how to manage these tax payments, going forward.