Q: I own a vacant block which I am hoping subdivide in a few years. A tax amendment will mean no tax deductions for some holders of vacant land, but I understand there were some amendments to the original bill, which means it may not be so bad. Can you bring me up to speed?
A: Owners of vacant land will no longer be able to claim a deduction for their costs, following the passage of legislation last month. But it is not as bad as it might have been.
The bill was amended on the way through Parliament and there are now some exceptions to the rule.
Exceptions apply to vacant land held by primary producers, land available for use in carrying on a business under arm’s length arrangements, and structures affected by natural disaster or other exceptional circumstances.
Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 includes a provision that denies deductions for losses or outgoings incurred that relate to holding vacant land.
The new law does not apply to land that is held for use in the course of carrying on a business in order to earn assessable income. This would apply to a property developer holding land for a future development.
The new law also does not apply to taxpayers that are corporate tax entities, superannuation funds (other than self-managed super funds), managed investment trusts or public unit trusts.
According to the explanatory memorandum accompanying the bill, the Government changed the law because “some taxpayers have been claiming deductions for costs associated with holding vacant land when it is not genuinely held for the purpose of gaining or producing assessable income.”
Land is defined as vacant if there is no substantial or permanent building or other structure that is in use or available for use on the land.
Costs include interest on borrowings, land taxes, council rates and maintenance costs.
The new law applies to costs incurred directly by the owner or costs incurred by a lessee.
Losses and outgoings that are not deductible in an income year as a result of these amendments are not able to be deducted in later years.
The bill was subject to a number of amendments in the Senate. As a result, deductions are still available for entities that incur costs in holding land while carrying on a primary production business.
Deductions are also available in cases where the land is treated as vacant land due to significant and unusual events or occurrences outside the reasonable control of the entity, such as fire, flood or substantial building defects.
In such cases of exceptional circumstances, deductions can be claimed for three years from the date the fire or flood or other event “first results in there being no substantial and permanent structure on the land.”