Ring-fencing has become a buzzword in Australian finance and tax circles, and for good reason. With sweeping changes to ring-fencing rules set to take effect in 2025, understanding this concept is more important than ever for investors, business owners, and anyone managing multiple income streams.
What is Ring-Fencing? A Practical Look
At its core, ring-fencing means separating a specific set of assets, liabilities, or income so they’re treated differently for legal, financial, or tax purposes. In Australia, ring-fencing is most commonly discussed in relation to property investments, business losses, and certain tax strategies.
For example, under current tax rules, investors could often offset losses from an investment property against their other income, reducing their overall tax bill. Ring-fencing changes this dynamic by isolating those losses—so they can only be used to offset income from the same asset or activity, not your salary or other investments.
- Property Investors: Losses from a negatively geared property may now be ‘ring-fenced’ and only used to offset future income from that property.
- Small Businesses: Losses from one business may be restricted from offsetting income from other ventures or personal income.
- Tax Planning: Ring-fencing can also apply to specific investment vehicles, like trusts or managed funds, to protect assets or manage liabilities.
2025 Ring-Fencing Policy Updates: What’s Changing?
The 2025 Federal Budget has put ring-fencing back in the spotlight. Here are the headline changes coming into effect from 1 July 2025:
- Property Loss Deductions Tightened: Investors will no longer be able to offset losses from residential investment properties against other forms of income. These losses will be ring-fenced, carrying forward to offset only future profits from the same property.
- Business Losses Segregated: Small and medium businesses will face new rules restricting the use of losses generated in one business to offset profits in unrelated business activities or personal income streams.
- Trust and Fund Structures: The ATO will scrutinise managed investment schemes and family trusts to ensure ring-fencing rules are applied, particularly where there’s risk of ‘double-dipping’ on losses.
These changes are designed to close loopholes, improve tax fairness, and ensure that tax benefits are more closely aligned to actual economic risks and returns.
Who’s Affected—and How?
The impact of ring-fencing will vary depending on your financial situation:
- Property Investors will need to reconsider negative gearing strategies. For example, someone with multiple negatively geared properties may see higher tax bills in the short term, as losses can’t reduce taxable salary income.
- Small Business Owners operating several ventures under one ABN or through different entities will need to track losses and profits separately. If one business runs at a loss, those losses can’t be used to reduce tax from another profitable business or side hustle.
- High-Income Earners who previously used investment losses to lower their taxable income will need new tax strategies. The ring-fencing rules mean fewer opportunities for aggressive tax minimisation.
Case in point: Jane, an IT consultant with a negatively geared investment property, previously used annual losses to reduce her taxable income. From 2025, those losses are ring-fenced—she can only use them to offset future profits from the property, not her consulting income.
Strategic Moves: Preparing for the 2025 Ring-Fencing Era
With the July 2025 deadline looming, now’s the time to review your structures and strategies:
- Review Asset Structures: Consider whether your investments or business activities should be held in separate entities to maximise flexibility within the new rules.
- Track Income and Losses: Accurate record-keeping will be critical. Make sure your accounting systems are ready to handle ring-fenced income and deductions.
- Rethink Gearing Strategies: Property investors should model the impact of ring-fencing on after-tax returns and consider diversifying into positively geared or neutral investments.
- Consult the 2025 Budget Papers: The ATO and Treasury have released detailed guidance on the new rules, including transition arrangements for existing assets.
The Bottom Line
Ring-fencing is no longer just a technical term for accountants—it’s set to reshape investment, tax, and business planning for thousands of Australians. The 2025 policy changes are a clear signal: tax benefits from losses will be harder to access, and smart structuring will be more important than ever.
