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Ring-Fencing of Residential Losses – Legislation Overview

The ring-fencing of residential property deductions was introduced through the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019. This legislation established a framework for limiting how residential property deductions can be applied, with key provisions outlined under Subpart EL of the Income Tax Act 2007.

Introduction of Subpart EL

The new Subpart EL, titled Allocation of deductions for excess residential land expenditure, outlines the mechanism for allocating residential property losses. It emphasizes a more restrictive approach to deductions, ensuring residential losses cannot offset income from unrelated sources.

Limited Allocation – Section EL 4(2)
Section EL 4(2) specifies:

"The amount of the deduction that may be allocated to the income year must be no more than the amount of the person’s residential income for the income year. An amount identified as a person’s residential income may be counted only once in making an allocation under this subpart."

This provision is crucial as it prevents individuals from offsetting residential property losses against their PAYE income or other business income streams. The losses can only be applied up to the extent of their residential property income in the same tax year, effectively containing any spillover effects into other income sources.

Policy Objective

The ring-fencing provisions aim to discourage speculative investments in residential property by ensuring property-related losses remain confined to the residential income category. This measure promotes fairness in the tax system and helps curb housing market distortions caused by property speculation.

Practical Implications

  1. Restricted Loss Deductions: Investors can no longer use losses from residential properties to reduce taxable income from other sources.
  2. Roll-Forward Mechanism: Excess losses can be carried forward to future tax years but remain ring-fenced within residential property income.
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