Deductions for vacant land

Taxpayers will be prevented from claiming a deduction for expenses incurred after 1 July 2019 for holding vacant land unless the costs are incurred in the course of carrying on a business of the taxpayer or certain related parties. There is no grandfathering for land acquired before 1 July 2019.

Where the holding costs, such as interest and council rates, are denied they will generally go to the cost base of the CGT asset. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base.

The amendments do not apply to companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

These amendments are targeted to the ‘Mum & Dad’ market, that is, individuals and closely held trusts and SMSFs. This is the same target as previous changes which deny travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties. However, these new changes do not just affect vacant land used for residential purposes.

If there is a substantial (substantive) and permanent building or structure on the land that is used or ready for use then deductions for holding costs could still be available subject to passing the normal deduction tests. As to exactly when a structure is substantial is not clearly defined. However, the Bill suggests that a silo or shearing shed would be substantial. On the other hand, a residential garage is unlikely to be substantial.

When constructing residential premises, for the holding costs to be deductible, there will need to a certificate of occupation granted by the relevant authority and the premises will need to be available for rent (although there will be an exception for newly constructed or substantially renovated residential premises. In these cases, no deductions would be available until the premises can be lawfully occupied and they are actually used to earn rental income or they are genuinely available for rent).

The changes apply to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.

Key changes were made to the rules ensuring that deductions can still potentially be available in relation to land in the following circumstances:

• The property becomes or is treated as being vacant due to significant and unusual events or occurrences outside the reasonable control of the entity, such as fire, flood, or substantial building defects;

• The land is held for use in a primary production business; or

• The land is leased or licensed under an arm’s length arrangement to another entity for use in carrying on a business on the land.