New rules on claiming tax deductions for vacant land
Note from the authors: Last month, we issued a paper summarising the Bill containing these new rules (the article can be found here). Prior to receiving Royal Assent, parliament made a number of changes to these rules. This paper summarises the main aspects of this legislation.
The federal government recently passed legislation so as to deny income tax deductions for expenditure incurred that relates to holding vacant land. Even though the legislation was only recently passed by federal parliament, the new rules apply from 1 July 2019.
Under these new rules, typical holding costs associated with vacant land – such as interest, land tax, council rates and maintenance costs – will no longer be tax deductible unless the relevant taxpayer is an ‘excluded entity’ for the purposes of these rules, or the taxpayer falls into one of the exemptions connected with these rules.
Excluded entities for the purposes of these new rules are: companies, superannuation plans (other than self-managed superannuation funds), managed investment schemes and public unit trusts (or unit trusts or partnerships of which all the members are entities of the above types). In other words, companies, superannuation funds (other than self-managed superannuation funds), managed investment schemes and public unit trusts are excluded from these rules.
On the other hand, discretionary trusts, unit trusts, individuals and self-managed super funds will fall within these new rules.
For this latter group of entities (in other words, trusts, individuals and self-managed super funds), vacant land holding costs will no longer be tax deductible from 1 July 2019 unless these entities fall into one of the exclusions to these rules. The exclusions are as follows:
- the vacant land is available for use in the course of a business carried on by the taxpayer;
- the vacant land is available for use in the course of a business carried on by a related or affiliated entity to the taxpayer;
- the land has become vacant because of a natural disaster, fire, structural defect or similar circumstance beyond the control of the relevant taxpayer;
- the land owning entity or its related or affiliated entity carries on a primary production business on the vacant land; or
- the land is leased or hired, per an arm’s length dealing, and is in use or available for use in carrying on a business by a third party.
If one of the exclusions above does not apply, and the relevant taxpayer is not one of the excluded entities, then vacant land holding costs will no longer be tax deductible from 1 July 2019.
Please note that the last two exclusions above – the primary production and leasing of land exemptions – are limited to land that is not residential premises (meaning there are no existing residential premises on the land, nor are there residential premises under construction on the land).
Where these rules apply to deny tax deductions, holding costs may fall into capital gains tax cost base expenditure. However, this will be cold comfort where say a taxpayer is receiving rent on the land, but because there is a residence, holding costs are denied and the rental income remains taxable. In other words, a taxpayer in these circumstances would be taxable on the rent, but would be denied claiming the holding costs on the land.
Cornwalls is currently discussing the impact of these rules with clients who own vacant land. We suggest that even property developers must be able to clearly demonstrate the business exemption described above, to ensure that it will apply to them.
In summary, as a result of these rules, it will be necessary for clients to reconsider the tax treatment of tax deductions for vacant land holding costs – and, in some cases, the structures in which vacant land is held by them.
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 any advice regarding the impact of these rules, please contact your Cornwalls representative or someone from the Cornwalls Tax team