Limiting Tax deductions for vacant land expenditure
1. The current law
Generally speaking, the current income tax law allows those who hold vacant land to claim a tax deduction for any costs associated with holding the land (e.g. interest, council rates, land taxes and insurance), provided the land is held for income-producing purposes or carrying on a business.
2. Proposed amendments
The draft law will deny tax deductions for expenditure regarding vacant land in certain situations.
The draft law (to deny tax deductions), will not apply where holding the vacant land is:
- used or held available for use in the course of carrying on a business that the taxpayer carries on for the purpose of gaining or producing assessable income; or
- used or held available for use in carrying on a business by:
(i) an affiliate, spouse or child of the taxpayer; or
(ii) an entity that is connected with the taxpayer or of which the taxpayer is an affiliate;
c. owned by a company, superannuation plans (other than self-managed superannuation funds), managed investment trusts or public unit trusts or unit trusts or partnerships of which all the members are entities of these types.
3. When will the land be vacant?
Land will be vacant for the purpose of these amendments if there is no substantial and permanent building or other structure that is in use or available for use on the land. A structure includes a building or other thing that is built or constructed on the land which is substantial and permanent. In addition, the substantial or permanent structure must have an independent purpose that is not incidental to another structure (e.g. a shed).
At this stage, these new amendments will apply from 1 July 2019 without any ‘grandfathering’ for property owned before the proposed start date.
4. Effect of the proposed amendments
These amendments are wide-reaching and likely to capture taxpayers and circumstances that were not the primary target of these changes.
The proposed amendments are likely to impact individuals and trusts who borrow to acquire land for investment purposes, and subsequently begin developing for rental investment purposes. Therefore, any borrowing costs and interest costs which depending on the property, could be a significant expense will only be deductible when the property is ready for use or available for use.
The concept of ‘use’ is surrounded by complexity because certain vacant blocks of land could be in use, e.g. a carpark. At this stage, it is unclear what the test will be to determine that land is ‘in use’.
5. Status of proposed amendments
At this stage, the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019, has yet to be enacted and remains before the Senate.
Significant lobbying surrounds this proposed new law; hence clients should be aware that there may be amendments to the Bill prior to it becoming law.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
For further information please contact the author or any member of our Tax team