On Budget night in May the Treasurer indicated there would be changes from 1 July 2019 that would deny some deductions for expenses related to holding vacant land. In Exposure Draft – Treasury Laws Amendment (Measures For A Later Sitting) Bill 2018 we finally have an idea of what they are going to stop us claiming deductions on.
While that exposure draft proposes to deny deductions for expense incurred to the extent they relate to holding vacant land, they do not apply to expenses relating to holding vacant land to the extent they are incurred in a business the that taxpayer, or an affiliate, spouse or child of the taxpayer carries on. They also do not apply to companies, superfund that are no SMSFs and entities used by institutional investors in residential premises.
Expenses that are not deductible are included in the cost base of the asset for CGT purposes.
But what is vacant land?
“no building or other structure on the land that is substantial and permanent in nature and in use or ready for use”.
Chelsy owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a large retaining wall, it currently does not contain any substantial or permanent building or other structure. As the property does not have a substantial permanent building or structure on it, it is vacant land and Chelsy cannot deduct any holding costs she may incur in relation to the land.
If there are vacant parts of land you need to reasonably attribute expenses to the vacant, and other, parts of the land.
Howard owns a country house with a pool on a hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. His house and firewood business are separated by a fence and the remainder of the land is unoccupied and unused. Howard intends to build a rental property on the unoccupied land.
Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying out his firewood business, to the extent that the loss or outgoing is necessarily incurred for the purpose of gaining or producing the assessable income from the business. He cannot deduct any expenses associated with the cost of holding the land on which his country house is built because that part of the land is used for private use.
The remainder of his land is unoccupied and is not used in carrying on his business and therefore Howard is not entitled to claim any deductions relating to the costs of holding this part of the land even though he intended to derive income from it in the future.
Deductions are not denied if you are carrying on a business, like property development or primary production.
Ainslie carries on business as a property developer and owns a significant property portfolio of vacant land in Melbourne. She incurs outgoings relating to holding the vacant land including interest payments and council rates. As she incurs the expenditure to hold the land in carrying on her business for the purpose of producing assessable income it is deductible.
Gina owns vacant land in New South Wales which she rents to her spouse Robin for use in a farming business he carries on. Robin, as Gina’s spouse, forms part of the class of related parties (spouses, children under 18 years old, affiliates and connected entities) that allow Gina to deduct her costs of holding the land. This is because Robin is carrying on a business on it to produce assessable income.
Finally, there is a special rule applies to land that contains residential premises within the meaning of the GST Act. Such structures are disregarded and the land is treated as remaining vacant for the purposes of these amendments until the residential premises are able to be occupied under the law and are leased, hired or licensed or available for lease, hire or licence.
Anna purchased a block of vacant land and built new residential premises on it. Occupancy permits are issued for the residential premises once the building is considered suitable for occupation. The building is available for lease and advertised in various property websites which give it broad exposure to potential tenants. Anna can deduct the cost of holding this block of land to the extent expenses relate to the period when the property is legally available for occupation and is leased etc or otherwise available for lease etc.
The summary, no probs for property developers… but what if you are not quiet yet a property developer…
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