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 Quarantined Expenditures

Quarantined expenditure rule: According to section DG 16 and 17, quarantined expenditure is when asset activity produces negative return. It applies when gross income is less than 2% of the value of the asset and expenditure is above the income.

For example: an apartment has a rateable value of $300,000. It produces a rental income of $4000 and deductions of $15,000. Since rental income is less than 2% of apartment value, excess expenditure of $11,000 is denied as deduction. Thus, the amount of $6,000 is quarantined expenditure and you cannot claim it in the current tax year. You need to quarantine the excess expenditure of $4,300 and carry it forward to offset against future profit from the rental.  

Opting out- per section DG21(2), if the person has an amount of quarantined expenditure for the year, the person may choose to treat the amount of income as exempt income under section CW8(B) for the income year. Please note this is not an exempt income if income is more than expenditure.

 

Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert. 

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New Zealand Tax Accountant.