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EL 16: Interests in residential land-rich entities
or “Rules for claiming interest on loans for investing in companies with significant residential property holdings”
You could also call this:

“How to calculate interest expenditure and net income for interposed entities”

You need to calculate your interest expenditure and share of net residential income when dealing with interposed entities. Here’s how you do it:

For your interest expenditure, you multiply the percentage of the entity’s capital used to buy residential rental property by the amount of interest you paid on your borrowings for the year.

To figure out your share of net residential income, you need to know your interest in the entity. If it’s a company, this is your voting interest at the end of the income year. If it’s a trust, it’s the value of your interest in the residential rental property as a percentage of the trust’s assets at the end of the income year. You then multiply this by the entity’s net residential income.

The entity’s net residential income is the amount of net income the entity would have if it only earned residential income, without considering section EL 4.

These calculations help determine how much of your residential property expenses you can claim under section EL 16.

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Next up: EL 18: Modifications when entities transparent

or “Special tax rules for transparent entities with residential income”
Next

Part E Timing and quantifying rules
Allocation of deductions for excess residential land expenditure: Interposed entities

EL 17Calculations for section EL 16

  1. For the purposes of section EL 16(2), the person’s interest expenditure is calculated using the formula—

    applied capital percentage × interest on borrowings.

    Where:

    • In the formula in subsection (1),—

    • applied capital percentage is the percentage of the entity’s capital, as at the end of the income year, that it has used to acquire residential rental property:
      1. interest on borrowings is the amount of expenditure on interest that the person has incurred for the income year in relation to the amount borrowed.

        1. For the purposes of section EL 16(2), the person’s share of net residential income is calculated using the formula—

          person’s interest × entity’s net residential income.

          Where:

          • In the formula in subsection (3),—

          • person’s interest is, as applicable,—
            1. when the entity is a company, the person’s voting interest in the company measured at the end of the income year:
              1. when the entity is the trustee of a trust, the value of the person’s interest in residential rental property that is trust property as a percentage of the trust’s assets, measured at the end of the income year:
              2. entity’s net residential income is the amount of the net income for the corresponding tax year that the entity would have in the absence of section EL 4, if the only income derived by the entity were residential income.

                Notes
                • Section EL 17: inserted (with effect on 1 April 2019), on , by section 62(1) (and see section 62(2) and (3) for application) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).