INCOME TAX ASSESSMENT ACT 1936 (ARCHIVE)

PART III - LIABILITY TO TAXATION  

Division 3 - Deductions  

Subdivision G - Limitation on deductions for interest on money borrowed to finance rental property investments  

SECTION 82KZC   INTERPRETATION  

82KZC(1)   [Definitions]  

In this Subdivision, unless the contrary intention appears:

commencement date
means 17 July 1985.

company title interest
, in relation to land, means a right of occupancy of the land, or of a building or part of a building erected on the land, arising by virtue of the holding of shares, or by virtue of a contract to purchase shares, in a company that owns the land or building.

eligible rental property deductions
, in relation to the taxpayer in relation to a year of income, means:

(a) deductions allowed or allowable to the taxpayer in the year of income that relate exclusively to rental property income of the taxpayer;

(b) rental property partnership deductions allowed or allowable to the taxpayer in the year of income; and

(c) so much of any other deductions allowed or allowable to the taxpayer in the year of income as, in the opinion of the Commissioner, may appropriately be related to rental property income of the taxpayer,

but does not include:

(d) deductions allowed or allowable, or that would, but for this Subdivision, be allowed or allowable, to the taxpayer in the year of income under section 51 in respect of rental property loan interest; or

(e) deductions allowed or allowable to the taxpayer in the year of income under Division 10C or 10D .

exempt residential land
, in relation to a person, means land that is used by the person for the provision of residential accommodation as mentioned in:

(a) paragraph (a) of the definition of housing and welfare in subsection 122(1) ;

(b) paragraph 124AA(2)(c) ; or

(c) paragraph 124JA(1)(a) .

improvement
, in relation to land, includes the construction or extension of, or the making of an alteration, improvement or addition to, a building or other structure on the land.

interest, in relation to borrowed money
, includes a payment in the nature of interest.

interest, in relation to land
, means -

(a) a legal or equitable estate or interest (including a leasehold interest) in the land;

(b) a company title interest in the land; or

(c) a right to receive income from the land,

but, except in the definitions of majority underlying interests , net value and underlying interest , subsections (6) and (8) and sections 82KZH and 82KZJ, does not include -

(d) a beneficial interest of a beneficiary of a trust estate; or

(e) an interest of a partner in partnership property.

interest in a partnership
includes an interest in a partnership held otherwise than as a partner.

lease
includes sub-lease and, in relation to a company title interest in land, includes an agreement similar to a lease or sub-lease.

loan
includes the provision of credit or any other form of financial accommodation and borrowed has a corresponding meaning.

majority underlying interests
, in relation to property, means more than one-half of -

(a) the beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in the property; and

(b) the beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

natural person
does not include a natural person in the capacity of trustee.

net rental value
, in relation to an interest in land that is used at the end of a year of income for rent producing purposes, means so much of the net value of the interest as the Commissioner considers appropriate having regard to the extent to which the land was so used at the end of the year of income.

net value
, in relation to an interest held by a person in land, means the value of the interest as reduced by so much of the liabilities of the person or of any interposed company, partnership or trust that holds an interest in the land as, in the opinion of the Commissioner, may appropriately be related to that first-mentioned interest.

net worth
, in relation to a company, partnership or trust estate, means the total value of the assets of the company, partnership or trust estate as reduced by the total liabilities of the company, partnership or trust estate.

partner's portion
, in relation to an amount (in this definition referred to as the full amount ) in relation to a partner in relation to a year of income, means -

(a) so much of the full amount as the partners have agreed is to be allocated to that partner; or

(b) if the partners have not agreed as to the part of the full amount that is to be allocated to that partner, the amount calculated in accordance with the formula

AB C

where -

A is the full amount;

B is the individual interest of that partner in the net income of the partnership of the year of income or in the partnership loss for the year of income, as the case requires; and

C is the net income of the partnership of the year of income or the partnership loss for the year of income, as the case requires;

post commencement date improvement
, in relation to land, means an improvement to the land (whether or not any expenditure was incurred in making the improvement) except where -

(a) the making of the improvement commenced on or before the commencement date;

(b) the improvement was made pursuant to a contract entered into on or before the commencement date; or

(c) the following conditions are satisfied:

(i) money was borrowed and used by a person to make the improvement;

(ii) all money so borrowed and used was borrowed under a contract or contracts entered into on or before the commencement date;

(iii) the person -

(A) held an interest in the land at the end of the commencement date; or

(B) acquired an interest in the land after the commencement date under a contract entered into on or before the commencement date.

rent
means any payment (in this definition referred to as a rental payment ) made by a lessee under a lease and includes a payment (whether made by a lessee or another person) in the nature of a rental payment.

rental property company equity investment
, in relation to the taxpayer in relation to a year of income, means a share held by the taxpayer at any time during the year of income in a company that is a rental property company in relation to the year of income.

rental property company security investment
, in relation to the taxpayer in relation to a year of income, means a security of a company held by the taxpayer at any time during the year of income, being a security of a company that is a rental property company in relation to the year of income.

rental property income
, in relation to the taxpayer in relation to a year of income, means -

(a) any assessable income derived by the taxpayer in the year of income by way of rent in respect of land (other than exempt residential land) where -

(i) the taxpayer acquired an interest in the land after the commencement date; or

(ii) the taxpayer or another person made a post commencement date improvement to the land;

(b) any amount included in the assessable income of the taxpayer of the year of income under subsection 25(1) or section 25A or 26AAA in respect of the sale of an interest in land that was used by the taxpayer at any time for rent producing purposes where -

(i) the taxpayer acquired an interest in the land after the commencement date; or

(ii) the taxpayer or another person made a post commencement date improvement to the land;

(c) any amount included in the assessable income of the taxpayer of the year of income in respect of a dividend paid to the taxpayer in respect of a rental property company equity investment acquired by the taxpayer after the commencement date;

(d) any amount included in the assessable income of the taxpayer of the year of income in respect of a rental property partnership equity investment of the taxpayer acquired by the taxpayer after the commencement date;

(e) in a case where -

(i) a deduction is allowable to a rental property partnership in the year of income under Division 10C or 10D ;

(ii) the taxpayer is a partner in the partnership;

(iii) the taxpayer became a partner after the commencement date; and

(iv) the amount (if any) included in the assessable income of the taxpayer of the year of income under section 92 is less than the amount that would have been so included in that assessable income if no deduction had been allowable as mentioned in subparagraph (i),

the amount of the deficiency referred to in subparagraph (iv);

(f) any amount included in the assessable income of the taxpayer of the year of income under section 97 or 100 in respect of a rental property trust estate equity investment acquired by the taxpayer after the commencement date;

(g) any amount included in the assessable income of the taxpayer of the year of income in respect of a unit trust dividend in respect of a rental property trust estate equity investment of the taxpayer acquired by the taxpayer after the commencement date;

(h) any amount included in the assessable income of the taxpayer of the year of income under subsection 25(1) or section 25A or 26AAA in respect of the sale of -

(i) a share in a company acquired by the taxpayer after the commencement date where the company is a rental property company in relation to -

(A) the year of income; or

(B) a preceding year of income, being a year of income during the whole or any part of which the share was held by the taxpayer;

(ii) an interest in a partnership acquired by the taxpayer after the commencement date where the partnership is a rental property partnership in relation to -

(A) the year of income; or

(B) a preceding year of income, being a year of income during the whole or any part of which the interest was held by the taxpayer; or

(iii) an interest in a trust estate acquired by the taxpayer after the commencement date where the trust estate is a rental property trust estate in relation to -

(A) the year of income; or

(B) a preceding year of income, being a year of income during the whole or any part of which the interest was held by the taxpayer;

(j) any assessable income derived by the taxpayer in the year of income by way of interest under -

(i) a rental property company security investment;

(ii) a rental property partnership security investment; or

(iii) a rental property trust estate security investment,

acquired by the taxpayer after the commencement date;

(k) any amount (not being an amount to which paragraph 26(e) applies) included in the assessable income of the taxpayer of the year of income being an amount received by way of insurance, indemnity, recoupment, recovery or reimbursement for or in respect of any loss or outgoing which is an eligible rental property deduction;

(m) any amount included in the assessable income of the taxpayer of the year of income under subsection 63(3) in respect of a debt that has been brought to account as rental property income; and

(n) so much of any amount included in the assessable income of the taxpayer of the year of income under subsection 59(2) or (2C) in respect of the disposal, loss or destruction of property any depreciation of which is or was an eligible rental property deduction as, in the opinion of the Commissioner, may appropriately be related to the use of the property for the purpose of producing rental property income of the taxpayer.

rental property loan interest
, in relation to the taxpayer in relation to a year of income, means -

(a) interest incurred by the taxpayer in the year of income to the extent to which it is incurred -

(i) in respect of money borrowed and used by the taxpayer to acquire an interest in land, being an interest acquired after the commencement date; and

(ii) in respect of the use of the land by the taxpayer for rent producing purposes;

(b) interest incurred by the taxpayer in the year of income to the extent to which it is incurred -

(i) in respect of money borrowed and used by the taxpayer to make a post commencement date improvement to land; and

(ii) in respect of the use of the land by the taxpayer for rent producing purposes;

(c) interest incurred by the taxpayer in the year of income to the extent to which it is incurred -

(i) in respect of money borrowed and used by the taxpayer -

(A) to acquire a share in a company after the commencement date;

(B) to acquire a security of a company after the commencement date; or

(C) to pay a call made after the commencement date in respect of a share in a company, being a share acquired by the taxpayer after the commencement date; and

(ii) in respect of a time when the company is a rental property company;

(d) interest incurred by the taxpayer in the year of income to the extent to which it is incurred -

(i) in respect of money borrowed and used by the taxpayer -

(A) to acquire an interest in a partnership after the commencement date; or

(B) to acquire a security of a partnership after the commencement date; and

(ii) in respect of a time when the partnership is a rental property partnership; and

(e) interest incurred by the taxpayer in the year of income to the extent to which it is incurred -

(i) in respect of money borrowed and used by the taxpayer -

(A) to acquire a beneficial interest in a trust estate after the commencement date; or

(B) to acquire a security of a trust estate after the commencement date; and

(ii) in respect of a time when the trust estate is a rental property trust estate,

being interest in respect of which a deduction would, but for this Subdivision, be allowable to the taxpayer under section 51 .

rental property partnership deduction
, in relation to the taxpayer in relation to a year of income, means -

(a) where paragraph (b) does not apply - any deduction allowable to the taxpayer in the year of income under section 92 in respect of a partnership loss incurred by a rental property partnership in which the taxpayer became a partner after the commencement date; or

(b) where -

(i) a deduction is allowable to the taxpayer in the year of income under section 92 in respect of a partnership loss incurred by a rental property partnership in which the taxpayer became a partner after the commencement date; and

(ii) deductions were allowed to the partnership in the year of income under Division 10C or 10D ,

the amount (if any) that would have been allowable as a deduction to the taxpayer under section 92 if no deduction had been allowed to the partnership under those Divisions.

rental property partnership equity investment
, in relation to the taxpayer in relation to a year of income, means an interest held by the taxpayer at any time during the year of income in a partnership that is a rental property partnership in relation to the year of income.

rental property partnership security investment
, in relation to the taxpayer in relation to a year of income, means a security of a partnership held by the taxpayer at any time during the year of income, being a security of a partnership that is a rental property partnership in relation to the year of income.

rental property trust estate equity investment
, in relation to the taxpayer in relation to a year of income, means a beneficial interest held by the taxpayer at any time during the year of income in a trust estate that is a rental property trust estate in relation to the year of income.

rental property trust estate security investment
, in relation to the taxpayer in relation to a year of income, means a security of a trust estate held by the taxpayer at any time during the year of income, being a security of a trust estate that is a rental property trust estate in relation to the year of income.

right to receive dividends
, in relation to shares, means a right to have dividends that will or may be paid in respect of the shares paid to, or applied or accumulated for the benefit of, the person owning the right.

right to receive income
, in relation to land, means a right to have income that will or may be derived from the land paid to, or applied or accumulated for the benefit of, the person owning the right.

right to receive interest
, in relation to a security of a company, partnership or trust estate, means a right to have interest that will or may be derived under the security paid to, or applied or accumulated for the benefit of, the person owning the right.

security
, in relation to a company, partnership or trust estate, means -

(a) the rights of a lender under or in respect of a loan to the company, the partnership or the trustee of the trust estate;

(b) a right to receive interest from such a loan; and

(c) an interest in rights to which paragraph (a) applies or a right to which paragraph (b) applies.

share
, in relation to a company, includes -

(a) a right to receive dividends in respect of a share in the company; and

(b) an interest in a share in the company or in such a right.

transitional date
means 26 September 1985.

transitional year of income
means the year of income in which the commencement date occurred.

underlying interest
, in relation to property, means a beneficial interest held by a natural person (whether directly or through one or more interposed companies, partnerships or trusts) in the property or in any income that may be derived from the property.

unit trust dividend
means a unit trust dividend within the meaning of Division 6B or 6C .

82KZC(2)   [Money borrowed to repay other money previously borrowed]  

For the purposes of this Subdivision, money borrowed, to the extent to which it is borrowed and used to repay other money previously borrowed and used for a particular purpose, shall be taken to have been borrowed and used for the same purpose as the money previously borrowed but, where money borrowed by a person under a contract entered into after the commencement date is borrowed and used for any one or more of the following purposes:

(a) the making of a post commencement date improvement to land (in this subsection referred to as the original land );

(b) the acquisition after the commencement date of an interest in land (in this subsection also referred to as the original land ) in which the person already holds an interest;

(c) the acquisition after the commencement date of an interest in property (in this subsection referred to as the original property ) other than land, being property in which the person already holds an interest,

any other money borrowed by the person under the same contract, being money borrowed and used to repay money previously borrowed and used:

(d) in a case to which paragraph (a) or (b) applies - for either or both of the following purposes:

(i) the making of an improvement to the original land;

(ii) the acquisition of an interest in the original land; or

(e) in a case to which paragraph (c) applies - to acquire an interest in the original property,

shall be taken to have been borrowed and used by the person:

(f) in a case to which paragraph (a) or (b) applies - for the purpose referred to in paragraph (a); or

(g) in a case to which paragraph (c) applies - for the purpose referred to in that paragraph.

82KZC(3)   [Money borrowed used to acquire or improve property before acquisition]  

For the purposes of this Subdivision, where:

(a) property is acquired by the taxpayer at a particular time; and

(b) the taxpayer incurs interest in respect of money borrowed and used by the taxpayer or another person to acquire, or make an improvement to, the property before that time,

the interest shall be deemed to be incurred in respect of money borrowed and used by the taxpayer to acquire the property at that time.

82KZC(4)   [Land used for rent producing purposes]  

For the purposes of this Subdivision, land shall be taken to be used by a person (in this subsection referred to as the rent receiver ) at a particular time for rent producing purposes if:

(a) at that time, the land is used, or held ready for use, by the rent receiver or another person, for the purpose of producing rent (whether or not the land was also used, or held ready for use, for any other purpose);

(b) any of that rent will be, or would be, included in the assessable income of the rent receiver of any year of income; and

(c) the land is not exempt residential land of the rent receiver.

82KZC(5)   [Interpretation]  

In this Subdivision:

(a) a reference to the acquisition of property after the commencement date does not include a reference to the acquisition of property under a contract entered into on or before the commencement date;

(b) a reference to an acquisition of property occurring by reason of the death of a person includes a reference to an acquisition of property occurring as the result of:

(i) a will, a codicil or an order of a court varying or modifying the provisions of a will or codicil; or

(ii) an intestacy or an order of a court varying or modifying the application, in relation to the estate of a deceased person, of the provisions of a law relating to the distribution of the assets of persons who die intestate;

(c) a reference to the making of an improvement by a person includes a reference to:

(i) the making of an improvement by another person on behalf of the first-mentioned person; and

(ii) the making of an improvement by the first-mentioned person and another person;

(d) a reference to the acquisition of an interest in property includes a reference to the acquisition of an additional or increased interest in the property;

(e) a reference to the acquisition of property includes a reference to the acquisition of property at the time when the property comes into existence; and

(f) without limiting the generality of paragraph (e), a reference to the acquisition of a security by a person includes a reference to the making by the person of the loan by virtue of which the security comes into existence.

82KZC(6)   [Rental property company, partnership or trust estate]  

Subject to subsection (7), a company, partnership or trust estate shall be taken, for the purposes of this Subdivision, to be a rental property company, rental property partnership or rental property trust estate, as the case may be, in relation to a year of income, if:

(a) at the end of the year of income, the company, partnership or the trustee of the trust estate held (whether through one or more interposed companies, partnerships or trusts or otherwise) an interest or interests in one or more parcels of land that, at the end of the year of income, was used (whether or not by the first-mentioned company, partnership or trustee) for rent producing purposes; and

(b) at the end of the year of income, the net rental value of the interest, or the aggregate of the net rental values of the interests, is not less than 75% of the net worth of the first-mentioned company, partnership or trust estate.

82KZC(7)   [Company not a rental property company in certain circumstances]  

Where:

(a) at any time (in this subsection referred to as the disposal time ) during a year of income (in this subsection referred to as the current year of income ), the taxpayer disposed of a share in, or security of, a company;

(b) if the current year of income had ended immediately before the disposal time, the company would not be taken, for the purposes of this Subdivision, to be a rental property company in relation to the current year of income;

(c) the taxpayer did not, after the disposal time and during the current year of income, hold any share in, or security of, the company; and

(d) having regard to the purpose or object underlying this Subdivision, it would be reasonable for this Subdivision to apply in relation to the taxpayer as if the company were not a rental property company in relation to the current year of income,

for the purposes of the application of this Subdivision in relation to the taxpayer in relation to the current year of income or any other year of income, the company shall not be taken to be a rental property company in relation to the current year of income.

82KZC(8)   [Calculation of net worth or net value of interest]  

In calculating for the purposes of this Subdivision the net worth of a company, partnership or trust estate, or the net value of an interest held by a person in land, the Commissioner shall, if the Commissioner is satisfied that anything was done for the purpose, or for purposes that included the purpose, of ensuring that section 82KZD would not apply in relation to the taxpayer, disregard the doing of that thing.