Changes to Rental Property Losses
From the 2019 - 2020 financial year (starting 1 April 2019 and ending 31 March 2020), residential rental property losses can no longer be offset against income from other sources such as wages, salary or business income.
Losses will instead be carried forward to be offset against future income from residential properties.
The new rules apply to residential land, which includes rental properties and other residential land (e.g. bare land). There are exclusions to the rules which include:
The tax payer’s main home
Mixed use assets such as baches
Property that will be taxed on sale
Employee accommodation
By default, property owners can offset losses from one rental property against rental income from other properties - calculating their overall loss or profit across their portfolio.
Alternatively, property owners can choose to apply the rules on a property-by-property basis, which means losses from one property can only be offset against the income from that property.
Before the introduction of these rules, residential rental property owners making a loss could use the deductions from their rental properties to offset their income from other sources, thus reducing their income tax liability. Under the new rules, the loss will instead be carried forward for use against residential property income in future years.
Exclusion of the taxpayer’s main home:
To qualify for exclusion from these new rules, the property has to be used predominantly as the person’s main home for most of the particular income year.
Exclusion of mixed use assets:
The definition of “residential land” includes holiday houses which may be used privately and also sometimes rented out. Because the mixed use asset rules already contain their own ring fencing rules, property that is an asset for the purposes of the mixed asset rules is not subject to these new rules.
Property that will be taxed on sale:
The new rules will not apply to land that will be taxed on sale. Where land will be taxed on sale, there is not the same concern about the deductible expenses relating to untaxed gains, as all economic income from the investment will be taxed.
If the land is due to be taxed on sale due to being held in a dealing, development, subdivision or building business, there are no notification requirements for the exclusion to apply.
If the land is due to be taxed on sale due to another provision (such as being acquired with the intention of resale), the exclusion is only available if the taxpayer notifies the Commissioner.
Employee accommodation:
There is an exclusion to the rules for residential land that a taxpayer provides to their employees or other workers for accommodation in connection with their employment or service.
The employee accommodation does not apply if the employees/workers are associated with the owner of the land, unless it is necessary to provide the accommodation due to the nature or remoteness of the owner’s business.
There may be unused deductions for a rental property after it is sold. In some circumstances these may be released from the rules, meaning they can then be used against the taxpayer’s income from any source.
If the taxpayer sells a property to which the rules have been applied on a property-by-property basis and the sale is not taxed, the unused deductions would remain ring fenced and be carried forward to any future year in which rental income from another property is received, at which point they would be transferred to that property.
If the sale of the property was taxed, any remaining unused deductions (if not already completely used to offset the taxable income from the sale) will be unfenced. This means the deductions are no longer subject to the rules and will offset any income the taxpayer has from other sources in the year of the sale. If the taxpayer does not have any other income, or not enough to fully utilise the deductions, they will have an overall net loss, which will be carried forward and used against future income.