Income Tax Assessment Act 1997

CHAPTER 2 - LIABILITY RULES OF GENERAL APPLICATION  

PART 2-5 - RULES ABOUT DEDUCTIBILITY OF PARTICULAR KINDS OF AMOUNTS  

Division 26 - Some amounts you cannot deduct, or cannot deduct in full  

Operative provisions  

SECTION 26-155   Using or holding residential dwellings  
General rule

26-155(1)    
If the amounts relating to the using or holding of * residential dwellings as residential accommodation that you could otherwise deduct for an income year exceed your assessable income from using or holding residential dwellings as residential accommodation for the income year, this Act applies to the amount of the excess as follows:

(a)    it is not deductible for that income year;

(b)    it is an amount (a quarantined amount ) that could be applied in accordance with the method statement in section 102-5 (about working out your net capital gain) for that income year;

(c)    to the extent any part of it remains after applying that method statement - it is treated as an amount relating to using or holding residential dwellings as residential accommodation for the next income year.

Example:

Henrietta acquires an established residential dwelling in July 2028. For the 2028-29 income year Henrietta has assessable income of $ 50,000 from renting out the residential dwelling as residential accommodation. For that year, Henrietta has (but for this subsection) $ 65,000 in deductions for the residential dwelling, including interest, insurance and strata costs. She can only deduct $ 50,000 and the remaining $ 15,000 is carried forward to the next income year.

For the 2029-30 income year, Henrietta has (but for this subsection) $ 70,000 in deductions and $ 52,000 of assessable income from renting out the residential dwelling as residential accommodation. She can deduct $ 52,000 and $ 33,000 is carried forward to the next income year (comprising the $ 15,000 carried forward from the 2028-29 income year and $ 18,000 from the 2029-30 income year).

For the 2030-31 income year, Henrietta has $ 20,000 in deductions and $ 72,000 of assessable income from renting out the residential dwelling as residential accommodation, having reduced her mortgage following an inheritance. She has net rental income from the residential dwelling of $ 52,000 for this income year and can fully offset the amount of $ 33,000 that has been carried forward from the previous income year.

Exceptions for non-quarantined residential dwellings

26-155(2)    
For the purposes of subsection (1) , disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to the using or holding of the following:

(a)    an * ownership interest in a * residential dwelling you last * acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2026;

(b)    a residential dwelling that is a * new residential dwelling in relation to you;

(c)    a residential dwelling for an activity or purpose determined by the Minister by legislative instrument for the purposes of this paragraph.

Note:

If you have a net gain from your non-quarantined residential dwellings for an income year: see subsection (6) .

26-155(3)    
Despite subsection 118-130(2) , for the purposes of paragraph (2)(a) of this section, for a * residential dwelling that you * acquire under a contract, you have an * ownership interest in the residential dwelling from the time when you enter into the contract.

26-155(3A)    
Before determining an activity or purpose for the purposes of paragraph (2)(c) , the Minister must be satisfied that determining the activity or purpose will assist in achieving one or more of the following objectives:

(a)    improving availability of social or affordable housing;

(b)    improving housing outcomes for one or more of the following:

(i) Aboriginal or Torres Strait Islander persons;

(ii) persons with a disability;

(iii) aged persons;

(iv) another class of persons suffering disadvantage.

Exception for certain kinds of entities

26-155(4)    
Subsection (1) does not apply to you if you are:

(a)    a widely held unit trust as defined in section 272-105 in Schedule 2F to the Income Tax Assessment Act 1936 ; or

(b)    a * complying superannuation entity.

Exception for fringe benefits

26-155(5)    
For the purposes of subsection (1) , disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to * providing a * fringe benefit.

Modification in relation to certain gains

26-155(6)    
Reduce the amount of an excess referred to in subsection (1) for an income year (before applying any of paragraphs (1)(a) to (c) ) by the sum of the following:

(a)    any amount by which your assessable income covered by subsection (2) for the income year exceeds your deductions covered by that subsection for the income year;

(b)    any gain you * realised for income tax purposes for the income year from a * realisation event occurring in relation to a * residential dwelling that is a * revenue asset.

Modification in relation to beneficiaries of trusts

26-155(7)    
If:

(a)    you are a beneficiary of a trust estate; and

(b)    an amount is taken to have been included in your assessable income for an income year under Division 6 of Part III of the Income Tax Assessment Act 1936 in relation to the * net income of the trust estate;

to the extent that the amount is referable (either directly or indirectly through one or more interposed partnerships or trust estates) to using or holding * residential dwellings as residential accommodation, the amount is taken to be included in your assessable income from using or holding residential dwellings as residential accommodation for that year.

Modification if you become bankrupt

26-155(8)    
The modification in subsection (9) has effect if:

(a)    in an income year (the current year ) you become bankrupt or are released from a debt by the operation of an Act relating to bankruptcy; or

(b)    you became bankrupt before the current year and:

(i) the bankruptcy is annulled in the current year under section 74 of the Bankruptcy Act 1966 because your creditors have accepted a proposal for a composition or scheme of arrangement; and

(ii) under the composition or scheme of arrangement, you have been, will be or may be released from some or all of the debts from which you would have been released if you had instead been discharged from the bankruptcy.

26-155(9)    
This Act applies to you as if any amount that:

(a)    is an amount that you cannot deduct for the current year in accordance with paragraph (1)(a) ; and

(b)    has not been applied in accordance with the method statement in section 102-5 ;

were not an amount relating to using or holding * residential dwellings as residential accommodation that you can deduct for the current year or a later year.