Deductions no longer available for holding vacant land

Overview

Effective from 1 July 2019, deductions for costs associated with holding vacant land will be denied for individuals, non-listed trusts and self-managed superannuation funds. Vacant land held by a corporate entity, managed investment trust, public superannuation funds and public unit trusts will continue to be still eligible to claim a tax deduction for expenses on vacant land after 1 July 2019.

The change to limit deductions on vacant land was first announced in the 2018-19 Federal Budget and introduced by Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019. It received Royal Assent on 28 October 2019.

Prior to 1 July 2019, taxpayers holding vacant land were allowed a deduction if the land was used for income producing purposes or if they were carrying on a business. Under the new law, deductions related to holding vacant land will be disallowed if the land is not available for rent or used in carrying on a business.

What is vacant land?

Vacant land is land that does not have a substantial and permanent structure or another structure on the land that is being used or available for use that has an independent purpose. The Australian Taxation Office (“ATO”) has provided its interpretation of what constitutes structures that meet the definition of “substantial and permanent”. These include a commercial parking garage, a woolshed, a grain silo or a farm homestead.

The changes introduced by the Bill will affect owners of residential rental properties, where the property is not rented or not available for rent.

What deductions are disallowed?

Deductions that will be disallowed under the new law will include:

  • interest on borrowed funds;
  • land tax;
  • rates; and
  • repairs and maintenance.

Costs associated with land that has both vacant and in use components will have deductions apportioned.

What happens to the disallowed deductions?

Disallowed deductions will not be lost. They will form part of the cost base of the vacant land for capital gains tax (“CGT”) purposes.

Exclusions

There are a few exclusions to deduction denial including land used in business and land effected by exceptional circumstances. Land used for business can include land that is being used for property development and primary production businesses. Exceptional circumstances include a natural disaster, a major building fire and substantial building defects. The exemption for exceptional circumstances is for a period of three years from the time that the circumstance arose. If the land is unable to be used for a period of longer than three years, the Commissioner of Taxation may apply his discretion to allow the exemption to last for a longer period. This article was co-authored with Christopher Pedler.