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Question: Does residential ring-fencing apply to a mixed-use residential property?
A look-through company ("LTC") owns a rental property. The property is rented out for short-term holiday accommodation about 80% of the time it is in use. However, the LTC owners also use the property as a family holiday home. As the property is (a) vacant for more than 62 days of the year, and (b) used for both income-earning and private use, it is subject to the mixed-use asset rules.
Are the losses that the property generates subject to the new rules for residential ring-fencing?
What happens if the LTC has other income from a contract for services? Are the losses from the residential property able to be utilised within the company against other income?
The residential ring-fencing rules apply to a person's deductions in relation to residential land. However, the ring-fencing rules do not apply to residential land that is a mixed-use asset.
In this case, as the LTC’s residential land is subject to the mixed-use asset rules, the ring-fencing of residential loses have no application. The mixed-use asset rules limit deductions in relation to the property and include a mechanism by which excess expenditure may be “quarantined”. Given these existing mechanisms for dealing with expenditure in relation to mixed-use residential land, the legislation drafters decided it was not considered necessary to include mixed-use property in the residential ring-fencing rules.
The owners of an LTC derive their income in proportion to their effective look-through interests. Similarly, the owners of an LTC incur their expenditure in proportion to their effective look-through interests. The excess deductions will be ring-fenced in the hands of the owners and cannot be offset against the other income of the owners, including any contracting income that owners are deemed to derive from the LTC.
Income Tax Act 2007, ss DG 3, EL 1, EL 4, EL 12.
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