DG 16Quarantined expenditure when asset activity negative

1. This section applies when—

2. a person incurs expenditure or loss for which they are allowed a deduction that is limited under section DG 7, DG 8, or DG 11, as applicable, for an income year; and
3. the amount of income derived for the income year from the use of an asset, other than an amount of exempt income, is less than 2% of—
   1. for land, including an improvement to land, the amount given under subsection (1B):
   2. for other property to which this subpart applies, its adjusted tax value.

4. For the purposes of subsection (1)(b)(i), the amount is the following amount, as applicable:

5. the amount given by the later of either—
   1. its most recent capital value or annual value as set by the relevant local authority; or
   2. its cost on acquisition or, if the transaction involves an associated person, its market value:
6. if the land or improvement to land is a leasehold estate in land, the market value of the leasehold estate which the person may establish by a valuation that is or has been made by a registered valuer no more than 3 years before the end of the income year:
7. if different activities are carried out on the land on a single record of title within the meaning of the Land Transfer Act 2017, the value applying under paragraph (a) or (b), as applicable, adjusted as follows:
   1. by multiplying the value by the percentage that the area of land that is the portion of the land used in relation to the asset to which this subpart applies bears to the total land area described in the record of title:
   2. by a valuation that is or has been made by a registered valuer no more than 3 years before the end of the income year, of the portion of land used in relation to the asset to which this subpart applies.

8. The amount of the person's excess expenditure for the income year is calculated using the formula—

   $expenditure\; -\; asset\; income.$

   Where:

9. In the formula,—

10. expenditure is the total of the following amounts:
    1. the total amount of deductions that the person is allowed for the income year under sections DG 7, DG 8, and DG 11, as applicable and after any necessary apportionment; and
    2. an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:
11. asset income is the total amount of income, other than an amount of exempt income, derived for the income year from the use of the asset.

12. The excess expenditure calculated under subsection (2) is quarantined and denied as a deduction for the income year.

13. If the amount of expenditure for the income year is less than the amount of income for the income year, the excess income is the outstanding profit balance for the income year to be used under section DG 18. If the amount of expenditure for the income year is equal to or more than the amount of income for the income year, the outstanding profit balance is treated as zero.

14. For the purposes of the formula in subsection (2), if the amount of income for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

Notes

• Section DG 16: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 17 July 2013, by section 30(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
• Section DG 16(1)(a): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 107(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 16(1)(b)(i): replaced (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 30 June 2014, by section 56(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 16(1B) heading: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), by section 56(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 16(1B): inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), by section 56(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 16(1B)(c): amended, on 12 November 2018, by section 250 of the Land Transfer Act 2017 (2017 No 30).
• Section DG 16(1B)(c)(i): amended, on 12 November 2018, by section 250 of the Land Transfer Act 2017 (2017 No 30).
• Section DG 16 example: amended (with effect on 1 April 2013), on 30 June 2014, by section 59 of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).