Land banking and Steele's Deductions - reminder

A recent client issue bring to mind a issue announced in the last budget which is slowly making its way towards becoming law.

In the last budget te announcement was that taxpayers would be denied all deductions for property until such time that the property hd a occupancy cert AND was available to rent. So those who have claimed steele's deductions for holding interest during a build etc will all be affected.

The proposed law was released for public consultation a few weeks back and its closed now. But the docs provide some insight into who will be affect etc

Can a unit trust escape the issue ? No.
Can a company escape the issue ? Maybe.....But it comes with a catch. ONLY if the company has other income but a company may avoid the rule that requires the holding costs to be capitalised and never claimed. May be a convenient vehicle to defer the deduction as a carried forward loss until the time when rents occur where all other taxpayers will generally be required to add these costs to the costbase. The use of a company needs to consider more however - Like financing, loss of CGT discount (which may become 25% under ALP) etc. And of course a company limits neg gearing that individual taxpayers may seek.
Can a SMSF escape the issue ? No.

One measure that needs explaining is that some entities are excluded. BUT.... Only if ownership and interest are ALL held by excluded parties. If a human for example owns 1% then the whole lot fails. No immediate deduction for any of the parties.

Broadly speaking this law wont apply to a developer operating a business. But a isolated profit making enterprise may be caught. A build to hold situation will definitely be caught. Many may read the proposed law and note it say vacant land. So you buy a lot with a old house and clear the lot and retain it and build two other dwellings. Is that vacant land ? Yes. This law will consider it is vacant land where substantial construction occurs on a portion. eg a dwelling rather than a shed.

Start date 01 July 2019 subject to the law being passed. It hasnt even been submitted as a bill yet.

https://static.treasury.gov.au/uploads/sites/1/2018/10/181004-ED_vacant-land.-docx.pdf

 

Thanks for posting Paul.
I don't hold any vacant land in my portfolio, but when I read:
Context of amendments
1.6
As the land is vacant, there is often limited evidence about the taxpayer’s intent other than statements by the taxpayer.The reliance on taxpayer’s assertions about their current intention leads to compliance and administrative difficulties.
I am hearing it in my head as if Sir Humphrey Appleby was saying it. All of which is Public Service code for "we don't like it when we think the taxpayer is lying but we can't prove it".

 

...but will still prove it anyway.

 

You dont have to buy or own vacant land either. It can later (in whole or part) become vacant land.

You buy a old cottage. Rent it a while. Then clear half the lot to build villas or another dwelling. That cleared part is now vacant land requiring cost / interest apportionment (valuer required) as the interest on the lot now held to build is affected, but not the rented cottage portion. Or clear the whole lot, now its all vacant land.

I can hear Terry saying - You now have a blended loan. The common strategy is to leave it blended until completion then refinance and split.