Vacant Land Deduction – Table of Contents
Legislation that passed through Parliament last month prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land.
Previous Deductions for Vacant Land
Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates, and other ongoing holding costs.
New Laws Targeting Mum & Dad Investors
The new laws, aimed predominantly at Mum & Dads (individuals, closely held trusts, and SMSFs), prevent these deductions from being claimed. Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019, regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments will not only impact those intending to develop vacant land but those who have already acquired land to develop. This is the same target as previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.
Beyond Purely Vacant Land Deductions
The changes, however, go beyond purely vacant land for residential purposes. Deductions could also be denied for land with a building on it if that building is not ‘substantial’. The only problem is, the legislation does not clearly define what ‘substantial’ means. The Bill suggests that a silo or shearing shed would be substantial, but a residential garage, for example, would not meet the test.
Impact on Capital Gains Tax (CGT)
If the new measures prevent holding costs from being claimed as a vacant land deduction, then they will generally be added to the cost base of the asset for capital gains tax (CGT) purposes. This means that they can potentially reduce any capital gain made when you dispose of the property in the future. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base, and these costs cannot increase or create a capital loss on the sale of a property.
Positive Aspects of the New Rules
On the positive side, vacant land leased to third parties under an arm’s-length arrangement may continue to be eligible for the vacant land deductions for holding costs after 1 July 2019 if the land is used in a business activity. Also, land used in a primary production business will generally be excluded from the new rules. However, deductions could still potentially be lost (at least to some extent) if there are residential premises on the land or that are being constructed on the land.
Carve-Outs for Special Circumstances
There are also carve-outs for land which has become vacant or which cannot be used to produce income for a period of time due to structures being impacted by natural disasters or other events beyond the owner’s control.
Exemptions from the Amendments
The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts, or certain public trusts.
Understanding the Changes
Understanding these changes to the vacant land deduction is crucial for property investors and developers. The legislation’s retrospective nature means that many individuals and trusts who have already invested in vacant land with the intention of developing it into rental properties will be affected. This could lead to significant financial planning adjustments and a reevaluation of investment strategies.
Planning for the Future
For those who are currently holding vacant land or planning to purchase it, it is essential to consider the implications of these new vacant land deduction rules on your financial situation. Consulting with a tax professional or financial advisor can provide clarity and help you navigate these changes effectively. They can offer guidance on how to structure your investments to minimize the impact of the new vacant land deduction rules.
Staying Informed
Moreover, staying informed about any further legislative changes or updates is vital. The landscape of property investment and tax regulations is continually evolving, and being proactive in understanding these changes can help you make informed decisions. Keeping an eye on government announcements and seeking professional advice regularly can ensure that you remain compliant and optimize your investment returns.
In conclusion, the changes to the vacant land deduction rules represent a significant shift in how property investors and developers can claim deductions for holding costs. While the new laws aim to close loopholes and ensure fair taxation, they also pose challenges for those who have already invested in vacant land. By understanding the details of these changes and seeking professional advice, you can navigate this new landscape and make informed decisions about your property investments.
Read more about vacant land deductions from the ATO.
