Introductory provisions
EL 1 Outline of subpart: general
General outline
(1)
The provisions in this subpart, in general,—
(a)
limit a person’s deductions for expenditure incurred in relation to residential land to income derived from the land; and
(b)
suspend deductions for the excess expenditure for the income year in which the expenditure is incurred; and
(c)
provide that the excess amounts are carried forward to later income years in which the person derives residential income; and
(d)
release the excess amounts on fully-taxed disposals of land.
Allocation rules
(2)
Separate allocation rules apply for—
(a)
residential rental property, see the outline in section EL 2(1) to (6):
(b)
bright-line disposals of residential land, see the outline in section EL 2(7).
Defined in this Act: amount, deduction, dispose, income, income year, residential land, residential rental property
EL 2 Outline of subpart: specific provisions
Residential rental property
(1)
Sections EL 4 to EL 8 apply when a person owns a residential rental property and has expenditure or loss that relates to the property for which they are allowed a deduction. For this purpose, the expenditure does not include an amount that is a cost of revenue account property.
Application by portfolio or on property-by-property basis
(2)
The rules in sections EL 4 to EL 8 apply—
(a)
to a person’s residential portfolio:
(b)
by election, on a property-by-property basis.
Portfolios plus particular properties
(3)
A person may choose to apply the rules on a property-by-property basis for an income year to 1 or more properties while applying the rules on a portfolio basis in relation to other properties owned by them.
Use of amounts
(4)
If a person has excess expenditure under section EL 4, they may use the amount in later income years in which they derive residential income. In certain cases, the amounts are released from the application of the rules.
Exclusions
(5)
The following sections set out the properties that are excluded from the definition of residential rental property:
(a)
section EL 9: the person’s main home:
(b)
section EL 10: property held by the person on revenue account:
(c)
section EL 11: property held by certain persons and entities:
(d)
section EL 12: property to which subpart DG (Expenditure related to use of certain assets) applies:
(e)
section EL 13: property provided as employee accommodation.
Rules for certain entities
(6)
The following sections modify the general rules in this subpart:
(a)
section EL 14 relating to the continuity rules for companies:
(b)
section EL 15 relating to transfers between companies in wholly-owned groups:
(c)
sections EL 16 to EL 19 relating to deductions for interest expenditure when a person borrows to invest in a residential land-rich entity.
Bright-line disposals of residential land
(7)
Section EL 20 applies when a person sells residential land within the bright-line period and has expenditure that relates to the land for which they are allowed a deduction as a cost of revenue account property. The section also provides for the treatment of the expenditure when the sale is made to an associated person.
Defined in this Act: amount, associated person, company, deduction, employee, income year, interest, loss, own, residential income, residential land, residential land-rich entity, residential portfolio, residential rental property, revenue account property, wholly-owned group of companies
EL 3 Definitions for this subpart
In this subpart,—
land sales provisions means sections CB 6A to CB 14 (which relate to amounts derived from disposals of land)
residential income means the following amounts that a person derives for an income year in relation to residential land:
(a)
rental income which is the amount of income the person derives under sections CC 1 to CC 2 (which relate to amounts derived from the use of land) for the income year in relation to their residential portfolio:
(b)
depreciation recovery income which is the amount that the person derives under section CG 1 (Amount of depreciation recovery income) for the income year in relation to their residential portfolio:
(c)
an amount of net income that the person would have for the corresponding tax year if their only income were income under the land sales provisions from a disposal of property in their residential portfolio:
(d)
an amount of net income that the person would have for the corresponding tax year if their only income were income referred to in paragraphs (a) and (b) in relation to residential land to which section EL 4 does not apply because it is held on revenue account and falls within the exclusion set out in section EL 10
residential land-rich entity means—
(a)
a close company, partnership, or look-through company if more than 50% of its assets by value are residential land, whether the land is owned directly or indirectly, see section EL 19:
(b)
a trustee of a trust whose property includes residential rental property if more than 50% of the trust’s assets by value are residential land, whether the land is owned directly or indirectly, see section EL 19
residential portfolio—
(a)
means 1 or more residential rental properties that a person holds in a portfolio for an income year; and
(b)
includes a residential rental property that the person has included in their portfolio, whether or not they retain ownership of the property, in the period that—
(i)
starts at the beginning of the income year in which they first acquire a residential rental property that is included in their portfolio; and
(ii)
ends on the last day of the income year in which they dispose of the last of the residential rental properties included in their portfolio; and
(c)
does not include a residential rental property in relation to which a person is applying the rules on a property-by-property basis under section EL 6
residential rental property—
(a)
means residential land for which a person who owns the land is allowed a deduction relating to the use or disposal of the land; and
(b)
includes land that, for a time in an income year, is residential land.
Defined in this Act: acquire, amount, close company, deduction, depreciation recovery income, dispose, income, income year, land sales provisions, look-through company, net income, own, partnership, residential income, residential land, residential land-rich entity, residential portfolio, residential rental property, tax year, trustee
Allocation rules for residential rental property
EL 4 Allocation of deductions for loss-making residential rental properties
When this section applies
(1)
This section applies for an income year when a person is allowed a deduction for expenditure or loss incurred in relation to 1 or more properties in their residential portfolio, excluding any amount of a deduction under section DB 23 (Cost of revenue account property).
Limited allocation
(2)
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.
Excess amounts carried forward
(3)
To the extent to which the amount of the person’s deduction is more than their residential income, the excess amount is—
(a)
suspended as a deduction for the income year; and
(b)
carried forward to a later income year in which the person derives residential income; and
(c)
added to the amount of the deduction for expenditure or loss referred to in subsection (1) for the later income year.
Relationship with sections EL 5, EL 6, and EL 7
(4)
The application is modified by—
(a)
section EL 6 when a person chooses to apply the rules in this subpart on a property-by-property basis:
(b)
sections EL 5 and EL 7 when a person disposes of their residential portfolio or residential rental property, as applicable.
Defined in this Act: amount, deduction, dispose, income year, loss, residential income, residential portfolio, residential rental property
EL 5 When residential portfolios sold
When this section applies
(1)
This section applies for an income year (the current income year) when a person—
(a)
disposes of the last of the properties in their residential portfolio; and
(b)
has an unused excess amount under section EL 4(3) relating to their portfolio.
Disposal of fully-taxed portfolio: excess amounts released
(2)
If the person derives income under the land sales provisions for the current income year or for an earlier income year from the disposal of each of the properties in their residential portfolio, any unused excess amount relating to the portfolio is released from the application of the limited allocation rule in section EL 4(2) for the current income year. However, this subsection does not apply in relation to an unused excess amount transferred from another property, see section EL 8.
Disposal of incompletely-taxed portfolios: excess amounts carried forward
(3)
If the person does not derive income under the land sales provisions for the current income year or for an earlier income year from the disposal of each of the properties in their residential portfolio, any unused excess amount relating to the portfolio—
(a)
is an amount to which section EL 4(3) continues to apply for income years in which the person derives residential income; and
(b)
is treated as a deduction referred to in section EL 4(1) that is transferred to another residential rental property for an income year in which the person derives residential income.
Basis of allocation
(4)
For the purposes of subsection (3)(b), it does not matter whether the allocation of the transferred amount is made on a portfolio basis or on a property-by-property basis.
Defined in this Act: amount, deduction, dispose, income, income year, land sales provisions, residential income, residential portfolio, residential rental property
EL 6 Choosing to apply rules on property-by-property basis
Choosing other basis for calculation
(1)
For the purposes of section EL 4, and despite the references there and in the definition of residential income in section EL 3 to residential portfolios, a person may choose to determine the amount of the deduction that may be allocated for an income year under section EL 4(2) in relation to a single property (property A), whether or not—
(a)
they own residential rental properties other than property A:
(b)
those other properties are included in a residential portfolio.
Property A: income and expenditure
(2)
For the purposes of section EL 4(3), both the income derived by the person and the expenditure or loss to which the deduction relates must relate solely to property A and to no other property of the person.
Property A: excess amounts carried forward
(3)
An excess amount arising under section EL 4(3) in relation to property A is—
(a)
suspended as a deduction for the income year; and
(b)
carried forward to a later income year in which the person derives residential income from property A; and
(c)
added to the amount of the deduction for expenditure or loss referred to in section EL 4(1) for the later income year.
Election requirements
(4)
A person makes an election under subsection (1) by taking a tax position on that basis in their return of income for the income year in which the property becomes their residential rental property.
Effect of changes in tax positions
(5)
The election remains in effect for income years in which the person continues to take the tax position but if the person changes their tax position, property A becomes a property included in a residential portfolio.
Transitional rule for property acquired before 2019–20 income year
(6)
For the purposes of subsection (4), for residential rental property held at the start of the 2019–20 income year, the person must make the election referred to in subsection (1) in the return of income for that income year.
Defined in this Act: amount, deduction, income, income year, loss, residential income, residential portfolio, residential rental property, return of income, tax position
EL 7 When property A sold
When this section applies
(1)
This section applies for an income year when a person—
(a)
has chosen to apply the rules in this subpart on a property-by-property basis under section EL 6 to a particular property (property A); and
(b)
disposes of property A, whether or not it is residential rental property for the person at the time of the disposal; and
(c)
has an unused excess amount under section EL 4(3) relating to property A.
Taxed disposal of property A: excess amounts released
(2)
If the person derives income under the land sales provisions from the disposal of property A, any unused excess amount relating to property A is released from the application of the limited allocation rule in section EL 4(3) for the income year. However, this subsection does not apply in relation to an unused excess amount transferred from another property, see section EL 8.
Non-taxed disposal of property A: excess amounts carried forward
(3)
If the person disposes of property A but does not derive income under the land sales provisions from the disposal, any unused excess amount relating to property A—
(a)
is an amount to which section EL 4(3) continues to apply for income years in which the person derives residential income; and
(b)
is treated as a deduction referred to in section EL 4(1) that is transferred to another residential rental property for an income year in which the person derives residential income.
Basis of allocation
(4)
For the purposes of subsection (3)(b), it does not matter whether the allocation of the transferred amount is made on a portfolio basis or on a property-by-property basis.
Defined in this Act: amount, deduction, dispose, income, income year, land sales provisions, residential income, residential rental property
EL 8 Treatment of previously transferred amounts on fully-taxed disposals
When this section applies: transfers to portfolio properties
(1)
This section applies when—
(a)
an unused excess amount relating to a residential rental property or residential portfolio is treated as transferred under section EL 5(3)(b) or EL 7(3)(b) to a property that is included in another residential portfolio of a person; and
(b)
the person disposes of the last of the properties in their portfolio, having derived income from each disposal.
When this section also applies: transfers to properties
(2)
This section also applies when—
(a)
an unused excess amount relating to a residential rental property or residential portfolio is treated as transferred under section EL 5(3)(b) or EL 7(3)(b) for use in relation to another of a person’s residential rental properties (property B) in relation to which the person has chosen under section EL 6 to apply the rules on a property-by-property basis; and
(b)
the person disposes of property B, whether or not it is residential rental property for the person at the time of the disposal, and derives income for the income year from its disposal.
Treatment of transferred excess amounts
(3)
The amount that would otherwise be released under section EL 5(2) or EL 7(2) is reduced by an amount equal to the total unused excess amount transferred.
Defined in this Act: amount, dispose, income, income year, residential portfolio, residential rental property
Exclusions from rules
EL 9 Main home exclusion
General rule
(1)
Section EL 4 does not apply to residential land of a person for an income year if more than 50% of the land is used for most of the income year by the person as their main home.
Beneficiaries
(2)
Subsection (1) applies to trust property when—
(a)
more than 50% of the land is used for most of the income year by a beneficiary of the trust as their main home; and
(b)
a principal settlor of the trust does not have a separate main home.
Defined in this Act: income year, principal settlor, residential land
EL 10 Exclusion for land held on revenue account
Land acquired for purposes of business relating to land
(1)
Section EL 4 does not apply to residential land of a person that, when disposed of, will give rise to income of the person under section CB 7 (Disposal: land acquired for purposes of business relating to land).
Income under land sales rules
(2)
Section EL 4 does not apply to residential land of a person that, when disposed of, will give rise to income of the person under the land sales provisions other than section CB 7, regardless of when the disposal occurs.
Notification
(3)
In order for land to be excluded under subsection (2), the person must—
(a)
notify the Commissioner that the land is held on revenue account by the date for filing their return of income for the later of—
(i)
the income year in which they acquire the land:
(ii)
the income year in which the land becomes land that, when disposed of, will give rise to income under the land sales provisions:
(iii)
for land that is held at the start of the 2019–20 income year and is land that, when disposed of, will give rise to income under the land sales provisions, the 2019–20 income year:
(b)
be able to identify separately the deductions relating to the land.
When separate identification not required
(4)
Subsection (3)(b) does not apply to a person if all of their residential land, other than land excluded under subsection (1) and sections EL 9, EL 12, and EL 13,—
(a)
has given rise to income of the person under the land sales provisions:
(b)
will give rise to income under the land sales provisions, regardless of when the disposal occurs, and they have notified the Commissioner as described in subsection (3)(a).
Defined in this Act: acquire, Commissioner, deduction, dispose, income, income year, land sales provisions, notify, residential land
EL 11 Exclusion for property held by certain persons and entities
Section EL 4 does not apply to residential land owned by—
(a)
a company other than a close company:
(b)
a person or entity listed in schedule 36 (Government enterprises).
Defined in this Act: close company, company, residential land
EL 12 Exclusion for mixed-use assets
Section EL 4 does not apply to residential land of a person for an income year when the land is an asset referred to in section DG 3 (Meaning of asset for this subpart).
Defined in this Act: asset, income year, residential land
EL 13 Exclusion for property provided as employee accommodation
Accommodation connected with employment or service
(1)
Section EL 4 does not apply to residential land of a person that is property that a person provides to their employees or other workers for accommodation in connection with their employment or service.
Associated employees or workers
(2)
Subsection (1) does not apply if the employees or other workers are associated with the person, unless it is necessary for the person to provide the accommodation because of the nature or remoteness of a business carried on by them.
Defined in this Act: associated person, business, employee, employment, residential land
Application of rules by certain entities
EL 14 Continuity rules for companies
Despite sections EL 4, EL 5, EL 7, and EL 16, a company may not allocate an unused excess amount to a later income year if sections IA 5 and IP 3 (which relate to tax losses carried forward) would apply to restrict the carrying forward of the amount to the later income year, treating the amount as if it were an unused tax loss component.
Defined in this Act: amount, company, income year, tax loss component
EL 15 Transfers between companies in wholly-owned groups
Transferring unused amounts
(1)
If a company (company A) that is part of a wholly-owned group of companies has an unused excess amount carried forward under section EL 4(3), EL 5(3), or EL 7(3) for an income year, the company may transfer some or all of the excess amount to another company (company B) in the group.
Company B’s deduction
(2)
The amount transferred is treated as a deduction for expenditure or loss referred to in section EL 4(1) of company B in relation to a residential rental property of company B for an income year in which company B derives residential income.
When transfers made
(3)
The transfer of an excess amount is treated as made when both company A and company B take tax positions on that basis in their returns of income for the relevant income year.
Defined in this Act: amount, company, deduction, income year, residential income, residential rental property, return of income, wholly-owned group of companies
Interposed entities
EL 16 Interests in residential land-rich entities
When this section applies
(1)
This section applies when a person—
(a)
has borrowed money and used it to acquire an interest in an entity that is, for an income year, a residential land-rich entity; and
(b)
has interest expenditure for the income year in relation to the amount borrowed for which they are allowed a deduction.
Excess amounts carried forward
(2)
To the extent to which the portion of the person’s interest expenditure calculated under section EL 17(1) is more than their share of net residential income calculated under section EL 17(3), the excess amount is—
(a)
suspended as a deduction for the income year; and
(b)
carried forward to a later income year in which the person derives income that is—
(ii)
a distribution from the entity to the extent to which the distribution relates to residential land; and
(c)
added to the amount of the interest expenditure referred to in subsection (1)(b) for the later income year.
Modifications
(3)
The application of this section and section EL 17 is modified by section EL 18 when the entity is a partnership or a look-through company.
Defined in this Act: acquire, amount, deduction, income, income year, interest, look-through company, partnership, residential income, residential land, residential land-rich entity
EL 17 Calculations for section EL 16
Calculation of interest expenditure
(1)
For the purposes of section EL 16(2), the person’s interest expenditure is calculated using the formula—
applied capital percentage × interest on borrowings.
Definition of items
(2)
In the formula in subsection (1),—
(a)
applied capital percentage is the percentage of the entity’s capital, as at the end of the income year, that it has used to acquire residential rental property:
(b)
interest on borrowings is the amount of expenditure on interest that the person has incurred for the income year in relation to the amount borrowed.
Calculation of share of net residential income
(3)
For the purposes of section EL 16(2), the person’s share of net residential income is calculated using the formula—
person’s interest × entity’s net residential income.
Definition of items
(4)
In the formula in subsection (3),—
(a)
person’s interest is, as applicable,—
(i)
when the entity is a company, the person’s voting interest in the company measured at the end of the income year:
(ii)
when the entity is the trustee of a trust, the value of the person’s interest in residential rental property that is trust property as a percentage of the trust’s assets, measured at the end of the income year:
(b)
entity’s net residential income is the amount of the net income for the corresponding tax year that the entity would have in the absence of section EL 4, if the only income derived by the entity were residential income.
Defined in this Act: acquire, amount, company, income, income year, interest, net income, residential income, residential rental property, tax year, trustee, voting interest
EL 18 Modifications when entities transparent
For the purposes of sections EL 16 and EL 17, if the entity is a partnership or a look-through company,—
(a)
the person’s residential income for the income year is treated as their share of net residential income under section EL 17(3) unless paragraph (b)(ii) applies to modify the calculation of net residential income:
(b)
when the entity has chosen under section EL 6 to apply the rules in this subpart on a property-by-property basis for a particular property (property A), the formulas in section EL 17 are modified as follows:
(i)
the item applied capital percentage in section EL 17(2)(a) is read as if the residential rental property were property A; and
(ii)
the residential income derived by the person for the income year from property A is treated as their share of net residential income under section EL 17(3).
Defined in this Act: income year, look-through company, partnership, residential income, residential rental property
EL 19 Valuation of assets
Methods of valuation
(1)
For the purposes of section EL 17 and the definition of residential land-rich entity in section EL 3, an asset of a person or entity is valued at the end of an income year using,—
(a)
for land, including an improvement to land, the amount set out in subsection (2):
(b)
for property with an adjusted tax value, its adjusted tax value:
(c)
for other property, its market value.
Valuation of land
(2)
For the purposes of subsection (1)(a), the value of land is the following amount, as applicable:
(a)
the amount established by the later of—
(i)
the land’s most recent capital value or annual value as set by a local authority; or
(ii)
either the cost of the land on acquisition or, if the transaction involves an associated person, its market value:
(b)
for a leasehold estate in land, the market value of the land which the person may establish through a valuation made by a registered valuer no more than 3 years before the end of the income year.
Defined in this Act: adjusted tax value, amount, associated person, income year, land, leasehold estate, local authority, residential land-rich entity
Allocation rules for bright-line disposals of land
EL 20 Allocation of deductions related to bright-line disposals of residential land
When this section applies
(1)
This section applies for an income year when a person—
(a)
derives income under section CB 6A (Disposal within 5 years: bright-line test for residential land); and
(b)
is allowed a deduction under section DB 23 (Cost of revenue account property) in relation to the land.
Limited allocation
(2)
The amount of the deduction that may be allocated to the income year must be no more than the amount calculated using the formula—
bright-line income + net income from land.
Definition of items in formula
(3)
In the formula,—
(a)
bright-line income is the amount of income that the person derives for the income year under section CB 6A:
(b)
net income from land is the amount of net income that the person would have for the corresponding tax year if their only income were income under sections CB 6 to CB 14 (which relate to amounts derived from the disposals of land).
Excess amounts carried forward
(4)
To the extent to which the amount of the person’s deduction is more than the amount calculated under subsection (2), the excess amount is—
(a)
suspended as a deduction for the income year; and
(b)
carried forward to a later income year in which the person derives—
(i)
income referred to in subsection (1)(a):
(ii)
income under sections CB 6 to CB 14; and
(c)
added to the amount of the deduction referred to in subsection (1)(b) for the later income year.
Disposals to associated persons
(5)
Subsections (6) and (7) apply when a person disposes of land described in subsection (1)(a) to an associated person.
Limited allocation for associated disposals
(6)
Despite subsection (2), the amount of the person’s deduction for the income year of the disposal must be no more than the amount of the bright-line income referred to in subsection (3)(a) that they derive from the disposal.
Expenditure of associated persons
(7)
To the extent to which the amount of the person’s deduction under subsection (6) is more than the bright-line income derived by the person, the excess amount is treated as expenditure of the associated person incurred in acquiring the land.
Defined in this Act: amount, associated person, deduction, dispose, income, income year, net income, residential land, tax year