Limiting Deductions for Vacant Land

The proposed amendments for limiting deductions for vacant land as part of Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 has been introduced without notice to the House of Representatives today.

From 1 July 2019, the proposed legislation will limit deductions for expenses associated with holding vacant land. The measure does not apply to expenses associated with holding vacant land that is used by the owner or a related entity to carry on a business. For example, the measure will not apply to a business of primary production or to a property developer that is carrying on a business and is holding land for the purpose of that business.

 

I wonder how far off the nonresident CGT main residence exemption changes are then? They have already indicated it will re-emerge.

The transition and start date will be important

 

that one will definitely rear its ugly head again.

 

Do you have a link for this ? I'd like to read up on the details. Currently you could claim for expenses if you show intent to build. I would like to know if this has been changed...

 

@Danny370z yes that plan is to change.

https://parlinfo.aph.gov.au/parlInf...pload_pdf/712910.pdf;fileType=application/pdf

"Example 3.1: Vacant land

Chelsy owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a retaining wall, it currently does not contain any substantial and permanent building or other structure with an independent purpose that is not incidental to the purpose of another building or structure. As the block of land does not have a substantial and permanent structure on it, it is vacant land and Chelsy cannot deduct any holding costs she may incur in relation to the land."

 

The election saw the original bill end and now it must be reintroduced. The new law will terminate deductions until the property has an occupancy certificate & efforts to make it available for rent occur. All costs during the build will be non-deductible. Many people know these as Steele's deductions. This law ends that approach other than in limited cases. eg a BUSINESS of property developer.
The most common question is - cant I just claim to be in business because I want to sell for a profit. No. Elements of a business look at frequency and scale. Many developers are undertaking a isolated profit making activity. This doesnt meet that test.
Common question and answer #2 : Using a company structure etc doesnt change this

 

Site used as a carpark with no permanent structure
Is that considered a vacant?
Caravan site?

 

If it doesnt produce rental income then that law would treat it as vacant land or land intended for future construction that is vacant land.

Only newly constructed premises with an occupancy certificate that is made available for rent escapes.

The effect of this law stops budding developers claiming deductions on the way through unless they operate a business of property development. Deductions only commence once completed and made available.

It was one of the measures agreed by all levels of Govt to limit the heat in the property market. Other relate to duties, land tax and more

The site used as a car park may meet the definition of business use. However if the income was incidential (akin to peppercorn income while awaiting later construction) then it would potentially fail. unless the site was intended to be held for a business use. Each case will require review.

 

They are being used to carry on a business. As per the OP - these rules would not apply.

 

A business of property development ?? These laws are more specific.

Many businesses wont hold assets passively in the same entity as a business for asset protection reasons. Its one of the criticised element of the rules. So the test may fail if entity A is the business and entity B holds the land. And A & B wont always even have common ownership or be a subsidiary relationship.

I was proposing to look at the new bill to determine if they cater for this.

 

that isn't what the proposed legislation says

"3.42 These amendments do not prevent an entity from deducting a loss or outgoing that relates to holding vacant land, if at any time during the income year in which the loss or outgoing is incurred, the entity is:

• a ‘corporate tax entity’ within the meaning of the ITAA 1997;"

 

it is catered for.

"Example 3.4: Expenditure incurred in carrying on a business by a related party of the holder of land

Gina owns vacant land in New South Wales which she rents to her spouse Robin for use in a farming business he carries on. Robin, as Gina’s spouse, forms part of the class of related parties (spouses, children under 18 years old, affiliates and connected entities) that allow Gina to deduct her costs of holding the land. This is because Robin is carrying on a business on it to produce assessable income.

 

+like. The corporate exception makes the issue of structure choice somewhat important BUT if the sole activity of that company is the development the loss may just carry forward in any event. Most small devs seem to own a IP (personally) and seek to develop the site and seek neg gearing for the interest (at least). A company wont necessarily address this.

 

??? i'm confused

 

OK Peter & Sue have owned a IP for three years. They now want to develop the site and build 4 x townhouses. This is going to take 12-18 months and he wants to claim the interest on the holding and the finance for the build of approx $35K in that time period. His ownership is in personal name/s so the corporate structure wont assist. Without duties and CGT etc..... In any event he wants the neg gearing available and the company doesnt allow that either since the company is a separate legal entity. If they bought a new site and held this in a company the interest costs may not be offset with other income.

The company exception has limitations which require the COMPANY to have other sources of legit income.

 

How will peter and sue be affected when it has a structure on it ?

 

Has a structure ""on it"" ? In most instances they may demo a valueless dwelling to commence building works etc When they do this the land is classed as vacant land. A substantial dwelling test applies to even a portion of the land.

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 EM

3.25 For a loss or outgoing to be deductible, the relevant land must generally contain a structure at the time the loss or outgoing is incurred. [Schedule 3, item 3, subsection 26-102(1)]

and

3.39 A special rule applies when determining if land that contains residential premises within the meaning of the GST Act is vacant. The land is treated as remaining vacant for the purposes of these amendments until the residential premises are available to be occupied and are leased or available for lease etc.

ie demolition predates construction so deductions appear denied if both limbs of 3.39 are not met as well the holding costs being incurred after the structure compies with 3.39.

What seems unfair is that a prep developer business is excluded but a isolated profit making intention (which is not a business) which is also on revenue account is not. The new law only permits the unclaimed cost from being applied to a CGT costbase. However the denied cost cannot be a adjustment to ordinary income other if a deduction for the holding cost is permitted.

Peter and Mary may well consider sale to a corporate tax entity merely to enable the interest cost to be claimed, likely as a deferred carried forward loss and applied against future company income. However the transaction costs and tax impact of this need to be explored. Peter and Mary may well be better to seek a DA and sell to a developer

 

a profit from an isolated transaction would require both a Section 6-5 calculation and CGT calculation. the interest wouldn't be accounted for in the section 6-5 calculation by the looks of it but would form part of the CGT calculation.