Ring Fencing of rental losses

New legislation has been enacted on 26 June 2019 which restricts taxpayers from being able to offset their rental losses derived from residential investment property against other sources of income. The rules take effect from 1 April 2019, the current financial year!

Loss ring fencing applies to all "residential land" excluding your main home, land that is held on revenue account (land that is taxable on sale) and property subject to the mixed use asset rules (when there is business and private use, air bnb).  The new rule applies to individuals and interposed entities.  There are also interest limitations to quarantine interest deductions taken against the purchase of an interest in a residential land -rich company.

Ring fencing can be calculated on a portfolio approach or a property by property approach. The portfolio approach is the default position. This means if an investor has more than one property, losses of one property can offset against the income of another. 

On the sale of the rental property the rules provide either a partial or full release of the loss depending on various factors. If you depend on tax refunds arising from your rental losses you may need to review your cashflow . In some cases where the tax refund has been taken into consideration by banks where funding has been tight, this may have an impact on those with lower incomes and higher loan to value ratios (LVR) if interest rates rise. 

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Please note: The above E-newsletter notes and the related articles on our website are of a general nature and therefore we urge clients who may be affected by these changes to contact us to discuss your specific circumstances before making any changes or drawing any conclusions.

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