Tax Pooling - An unexpected source of working capital
There’s a source of funding available to most businesses seeking finance that they do not know about...
As forewarned in our previous tax publications, the government has now passed the law which will restrict the use of losses from residential property. These rules take effect from 1 April 2019, so apply from the current tax year.
The rules apply to ‘residential land’, using the same definition of ‘residential land’ already existing for the five-year bright-line test (basically, land zoned residential or used for residential purposes).
The rules apply by default on a ‘portfolio basis’, allowing investors to offset losses from one residential property against income from other properties the investor also holds. However, the investor can elect to apply the rules on a property-by-property basis (this could be useful if the investor holds some property which may be taxable on disposal).
Losses from residential rental properties will be ‘ring-fenced’, carried forward to future income years, and will only be able to be offset against:
If the property is held by a company, the usual losses carry forward rules (being 49% shareholder continuity) must also be met to allow unused residential rental losses to be carried forward.
There are anti-avoidance rules that apply if someone has an interest expense for money they borrow to provide funds to a 'residential land-rich entity', being an entity where more than 50% of the assets by value are residential land. Broadly, these loss ring-fencing rules apply to the interest deduction available to the owner of that land rich entity.
The following situations are not caught by the new rules:
These rules underwent substantial revision as they passed through the law-making process, and there are some added complexities that apply now to interposed entities and residential portfolios that are made up of both taxable and non-taxable residential properties.
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