Using or holding a residential dwelling for an activity or purpose determined by the Minister by legislative instrument is not subject to the general rule requiring that net rental losses from a residential dwelling used or held as residential accommodation are quarantined.
[Schedule 2 to the Bill, item 1, paragraph 26-155(2)(c) of the ITAA 1997]
Additionally, using or holding a residential dwelling for a business or enterprise of a kind determined by the Minister by legislative instrument is also not subject to the general rule requiring that net rental losses from a residential dwelling used or held as residential accommodation are quarantined.
[Schedule 2 to the Bill, item 1, paragraph 26-155(2)(d) of the ITAA 1997]
Without limiting the residential dwellings that could be determined by the Minister in relation to a business or enterprise under these instrument-making powers, an example of residential dwellings that could be determined in relation to a business or enterprise include, using or holding residential dwellings as rental properties to provide social or affordable housing.
This delegation of legislative power is appropriate as there are many different types of residential housing in existence now that provide concessionally priced rental accommodation to persons with particular needs. There are likely to be new types emerging in the future and changes to existing concessional rental accommodation types, and it would be impractical for the primary law to identify all these types of housing. Accordingly, it is appropriate to allow the Minister to use subordinate legislation to exclude certain types of housing from the requirement to quarantine losses given these factors. Additionally, the power is constrained as the Minister can only prescribe types of housing that are residential dwellings, which is a term defined in the primary law.
The legislative instrument would be subject to disallowance and would sunset after ten years and will therefore be subject to appropriate parliamentary oversight and scrutiny.
Further exceptions to the general rule for loss quarantining
Exception for certain kinds of entities
The general rule requiring that net rental losses from a residential dwelling used or held as residential accommodation be quarantined does not apply to the following entities:
widely held trusts (for example, most managed investment trusts).
complying superannuation entities (i.e. complying superannuation funds including self-managed superannuation funds, complying approved deposit funds and pooled superannuation trusts).
[Schedule 2 to the Bill, item 1, subsection 26-155(4) of the ITAA 1997]
Additionally, the restrictions on negative gearing introduced by this Schedule do not apply to an entity in a class of entities determined by the Minister by legislative instrument.
[Schedule 2 to the Bill, item 1, paragraph 26-155(4)(c) of the ITAA 1997]
Providing the Minister with this power is intended to allow additional types of entities to be prescribed for the purpose of excluding them from the requirement to quarantine amounts. This ensures that the new quarantining arrangements can be limited should their application to particular types of entities cease to be consistent with overall housing and tax policy considerations in light of changing circumstances.
The legislative instrument would be subject to disallowance and sunset after ten years and will therefore be subject to appropriate parliamentary oversight and scrutiny.
Exception for fringe benefits
An exception to the rules quarantining losses on residential dwellings used or held as residential accommodation applies to expenditure an employer incurs in providing a fringe benefit. This ensures that the changes do not affect businesses that directly provide housing to their employees.
[Schedule 2 to the Bill, item 1, subsection 26-155(5) of the ITAA 1997]
The effect is that expenditure incurred in providing a fringe benefit (for example, in providing a residential dwelling as a housing fringe benefit) is not subject to quarantining. This is consistent with the general treatment under the income tax law of expenses in providing fringe benefits and other loss quarantining provisions like section 26-47 of the ITAA 1997 concerning non‑business boating activities.
Modifications to the general rule for loss quarantining
The requirement to quarantine amounts from a residential dwelling used or held as residential accommodation (other than where there is an exception) applies to net losses incurred in income years starting on 1 July 2027 in relation to a residential dwelling that is acquired on or after 7.30pm (AEST) on 12 May 2026.
[Schedule 2 to the Bill, item 5]
Modification in relation to certain gains
The general rule that requires loss quarantining for residential dwellings used or held as residential accommodation is modified where in an income year an entity has:
assessable income from non-quarantined residential dwellings that exceeds the entity’s deductions relating to those non-quarantined residential dwellings; or
gains from the realisation of a residential dwelling that is a revenue asset.
In these cases, the amount of net losses from the using or holding of residential dwellings as residential accommodation is reduced by the amount of assessable income that exceeds the deductions from non-quarantined residential dwellings or gains from the realisation of a residential dwelling that is a revenue asset.
The reduced amount of net rental losses from using or holding residential dwellings as residential accommodation is then applied to capital gains in accordance with section 102-5 of the ITAA 1997 and any amount remaining after being applied is carried forward to the next income year.
[Schedule 2 to the Bill, item 1, subsection 26-155(6) of the ITAA 1997]
Modification in relation to beneficiaries of trusts
The general rule is modified in relation to beneficiaries of trusts. This modification ensures that the character of trust income flows through to beneficiaries of trusts to enable beneficiaries to apply trust income to the extent that it has the character of income from residential premises used as residential accommodation against any losses they may have from quarantined residential properties. This ensures that such beneficiaries are not adversely impacted where a trust distributes net income to them from such a source. The modification rules also allow the look through test to apply through interposed partnerships and trust estates also.
Similarly, the modification ensures that where an entity takes out a loan to acquire an interest in a unit trust, the interest costs for the loan will be subject to the operation of the general rules for loss quarantining for a property acquired by the unit trust that distributes net income to the entity.
[Schedule 2 to the Bill, item 1, subsection 26-155(7) of the ITAA 1997]
Modification where an entity becomes bankrupt
The general rule for loss quarantining is modified where an entity is declared bankrupt, is released from a debt under bankruptcy law or in certain cases where an existing bankruptcy is annulled under a composition or scheme of arrangement. In these cases, a quarantined amount that arises before bankruptcy cannot be deducted against assessable income from using or holding residential dwellings or applied to reduce capital gains arising from residential dwellings and new residential dwellings after a taxpayer is declared bankrupt. This includes any quarantined amounts generated in the year that the taxpayer is declared bankrupt. This exception follows the model in section 26‑47 (about quarantining losses for non-business boating activities), Divisions 35 (about deferral of losses from non-commercial business activities) and Division 36 (about deducting losses generally under the tax law) of the ITAA 1997.
[Schedule 2 to the Bill, item 1, subsections 26-155(8) and (9) of the ITAA 1997]
Following the general rule and determining if there is a carry‑forward loss
The following steps outline the process for complying with the general rule for quarantining losses and determining if you have a quarantined amount to be carried forward and applied in the next income year.
You are not required to complete any of the following steps if you are an excluded entity. These are a widely held trust, complying superannuation entity or an entity determined by the Minister (see paragraphs 2.54 to 2.57) above.
Step 2 - Determine any net income amount, disregarding exceptions from the general rule
Consider amounts that you can deduct (including quarantined amounts from the previous income year) and amounts of assessable income that relate to the using or holding of residential dwellings as residential accommodation. This includes amounts you receive as a beneficiary of a trust estate (see paragraphs 2.64 and 2.65 above).
You should then disregard any amounts that you can deduct and any amounts of assessable income that are covered by the exceptions. This includes amounts in relation to the using or holding of the following:
an ownership interest in a residential dwelling you last acquired before 7.30 pm, (AEST) on 12 May 2026 (see paragraphs 2.28 to 2.35);
a residential dwelling that is a new residential dwelling in relation to you (see paragraphs 2.38 to 2.48);
a residential dwelling used or held for an activity, purpose, business or enterprise of a kind determined by the Minister by legislative instrument (see paragraphs 2.49 to 2.53);
an amount relating to providing a fringe benefit (see paragraphs 2.58 to 2.59).
If, after excluding amounts covered by the exceptions, the amount you can deduct exceeds the amounts of assessable income, you have an excess amount that may be reduced in subsequent steps.
Step 3 - Determine whether the net income amount can be reduced
Consider amounts that you can deduct and amounts of assessable income that relate to the using or holding of residential dwellings as residential accommodation, that are covered by subsection 26-155(2) of Schedule 2.
If the amounts you can deduct exceed the amounts of assessable income, the excess amount is disregarded for the purposes of quarantining and you can deduct this excess amount against your other assessable income, consistent with current settings.
If the amounts of assessable income exceed the amounts that you can deduct, you then add this excess to any gains 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. You can then use the sum of these two amounts to reduce the excess from step 2. If any excess from step 2 remains after applying this reduction, this remaining excess is not deductible for the income year and is considered a quarantined amount.
Step 4 - Apply your quarantined amount against any capital gains from residential dwellings
You then apply any quarantined amounts you have in an income year against any capital gains relating to residential dwellings in accordance with the method statement in section 102-5 of the ITAA 1997 (about working out your net capital gain). The method statement sets out the rules for offsetting quarantined amounts.
Step 5 - Carry forward any remaining quarantined amount to the next income year
To the extent you have any remaining quarantined loss after following the above steps, it is treated as an amount relating to using or holding residential dwellings as residential accommodation that you can deduct in the next income year. Also consider if the special rules concerning gains on revenue account, bankruptcy and fringe benefits apply.
This allows you to carry forward any unused net rental losses to be used in future income years. In each income year you then follow the above steps, to determine if you have a remaining quarantined loss to be applied to the next income year.
Applying the general rule and carrying forward quarantined losses
Tyson owns four residential dwellings which he rents out to derive rental income. Residential Dwellings A and B were acquired in 2025 and are not subject to the quarantining rules. Residential Dwellings C and D were acquired after 7.30 pm AEST on 12 May 2026 and are subject to the quarantining rules.
In all income years, Tyson meets Step 1 (exclusion of exempt entities), given he is not an exempt entity.
Treatment in 2027-28 income year
The net income from Tyson’s residential dwellings for the 2027-28 income year are as follows:
Property
Net rental income/loss in 2027-28 ($) after offsetting deduction
Residential Dwelling A (negative gearing applies)
3,000
Residential Dwelling B (negative gearing applies)
2,000
Residential Dwelling C (quarantined)
5,000
Residential Dwelling D (quarantined)
-15,000
Step 2: Determine any net income amount, disregarding exceptions from the general rule
Tyson considers the amounts he can deduct, and the amounts of assessable income that relate to the using and holding of residential dwellings for residential accommodation. In doing so, he disregards these amounts from Dwellings A and B given they relate to using or holding residential dwellings covered by the relevant exceptions. This means Tyson considers Dwellings C and D, and whether there is an excess amount.
For the 2027-28 income year, there is an initial excess amount of $10,000 for Dwellings C and D.
Step 3: Determine whether the net income amount can be reduced
Next Tyson considers amounts that he can deduct and amounts of assessable income that relate to the using or holding of residential dwellings as residential accommodation, that are covered by subsection 26-155(2) of Schedule 2. In this case, this is Dwellings A and B, for which he has net income of $5,000 for the 2027-28 income year.
He then reduces the initial excess amount of $10,000 by this amount of $5,000, leaving a quarantined amount of $5,000 for the 2027-28 income year. This quarantined amount is not deductible for the 2027-28 income year.
Step 4: Apply your quarantined amount against any capital gains from residential dwellings
Tyson then considers if he has any capital gains relating to residential dwellings in the 2027-28 income year that he can apply the quarantined losses against, in accordance with the method statement in section 102-5 (about working out your net capital gain). For this income year he has none.
Step 5: Carry forward any remaining quarantined amount to the next income year
Tyson would then treat the remaining quarantined loss of $5,000 as an amount relating to using or holding residential dwellings as residential accommodation that he can deduct in the next income year (2028-29). This allows Tyson to carry forward the unused quarantined amount.
Applying carried forward quarantined losses against net rental income and capital gains
Treatment in 2028-29 income year
Assume the same facts as Example 2.5. Tyson has a $5,000 carry forward loss from the 2027‑28 income year, which is taken to be an amount relating to the using or holding of residential accommodation in the 2028‑29 income year. Tyson disposes of Dwelling B in the year for a capital gain of $20,000.
The net income and capital gains from each residential dwelling is as follows:
Property
Net rental income in 2028-29 ($)
Capital gain in 2028-29 ($)
Residential Dwelling A (negative gearing applies)
5,000
Residential Dwelling B (negative gearing applies)
-1,000
20,000
Residential Dwelling C (quarantined)
8,000
Residential Dwelling D (quarantined)
-10,000
Quarantined loss carried forward from previous income year
-5,000
Step 2: Determine any net income amount, disregarding exceptions from the general rule
Tyson considers the amounts he can deduct, and the amounts of assessable income that relate to the using and holding of residential dwellings for residential accommodation. In doing so, he disregards these amounts from Dwellings A and B given they relate to using or holding residential dwellings covered by the relevant exceptions. This means Tyson considers Dwellings C and D as well as his carried forward loss from the 2027-28 income year, to determine if there is an excess amount.
For the 2028-29 income year, there is an initial excess amount of $7,000.
Step 3: Determine whether the net income amount can be reduced
Next Tyson considers amounts that he can deduct and amounts of assessable income that relate to the using or holding of residential dwellings as residential accommodation, that are covered by subsection 26-155(2) of Schedule 2. In this case, despite Dwelling B having a rental loss of $1,000, the total amount from Dwellings A and B, is net income of $4,000 for the 2028-29 in the income year.
He then reduces the initial excess amount of $7,000 by this amount of $4,000, leaving a quarantined amount of $3,000 for the 2028-29 income year. This quarantined amount is not deductible for the 2028-29 income year.
Step 4: Apply your quarantined amount against any capital gains from residential dwellings
Tyson then considers if he has any capital gains relating to residential dwellings in the 2028-29 income year that he can apply the quarantined losses against, in accordance with the method statement in section 102-5 (about working out your net capital gain). For the 2028-29 income year, he has $20,000 of capital gains relating to residential dwellings. Consistent with the method statement, Tyson applies the $3,000 quarantined amount against his capital gain of $20,000. This reduces the capital gain to $17,000 for the 2028-29 income year.
Step 5: Carry forward any remaining quarantined amount to the next income year
After following all the preceding steps, Tyson does not have a quarantined amount to be carried forward to the next income year.