Hidden as one of the “tax integrity” measures in the 2018 Federal Budget was an announced measure to disallow property owners owning vacant land to claim deductions associated with holding the land, for example interest costs.
Effectively this denial of deductions creates a permanent tax disadvantage for property investors as these denied deductions cannot be carried forward or offset against other related entities income.
The stated policy objective of this measure is to reduce the incentive for “land banking” which denies the use of the land for housing or other development.
Of immediate concern is whether this measure will result in property developers holding land for development being denied interest deductions where they are holding land not yet ready for development due to waiting development permit approval. In cases of growth area corridor land parcels, this can clearly take months if not years.
We understand that the Property Council of Australia has received informal clarification that property development companies that have an operating business on the land should not be impacted by these measures.
However, given details of this announcement in the Budget was brief and it is not uncommon for land to be held separate from development entities for asset protection purposes and/or other valid commercial reasons (i.e. developed by third parties through development agreements), we will closely monitor this announcement as more details are released over time.
On a more positive note, there were no other significant new taxes or announcements adversely impacting property investors / developers in the Budget in particular those impacting foreign investors.
This new “land banking tax” measure applies from 1 July 2019.