Stage 1 of the Federal Government’s tax changes flagged in the Federal Budget was released on Thursday 28 May, with legislation tabled in Parliament. Stage 1 covers Capital Gains Tax (“CGT”) and negative gearing only – the trust taxation measures are understood to be some way off.
The negative gearing reforms are broadly in line with the announcements made on Budget night, however, some additional clarity is available in relation to how the reforms will be enforced and monitored.
From 1 July 2027, net rental losses from dwellings used or held as residential accommodation acquired on or after 7.30pm Budget night are only available as a deduction against net assessable income from “non-quarantined” residential dwellings or to reduce revenue or capital gains on residential dwellings.
In simple terms “Non quarantined” residential dwellings are those dwellings held before Budget night or new residential dwellings acquired after Budget night. Quarantined residential dwellings are those acquired after Budget night and are negatively geared.
There are a number of important aspects that the draft legislation has identified being:
- Individuals who receive a trust distribution need to understand the underlying source and whether it’s from net rental losses that are quarantined. If so, they need to apply the rules as if they incurred the rental loss directly;
- Individuals who borrow to acquire an interest in a unit trust will be subject to the tracing rules and therefore cannot simply negative gear the units to achieve the same commercial result.
Interestingly, there is no explicit corresponding provisions in relation to subscribing for shares in a company that acquires a residential property. Presumably this is because the company cannot access the indexation measures unlike a trust.
- Where losses are quarantined, they can be carried forward and offset against future income or capital gains from residential properties.
Lastly – it should be noted that the proposed legislation does include a number of unwanted surprises. The surprises relate to how certain items are defined for the purposes of interpreting the proposed rules (for example the definition of a “new residential dwelling”).
Whilst most if not all legislation has definitions enshrined into the law, the proposed legislation contains a provision which enables the “Minister” (ie the Treasurer) to issue legislative instruments to define the fundamental terms. This mechanism, whilst flexible, provides a heightened level of uncertainty for taxpayers as the Minister may change the rules by issuing new instruments without having to change the law and have it passed by Parliament. As such, investors now have an uncertain playing field as the rules may change at the drop of a hat.
As always please reach out to your Engagement Partner to discuss how these changes will affect your individual circumstances.
