Tax Deductions for "Vacant Land"

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 – Parliament of Australia

The proposed law has passed and been given royal assent. The changed law impacts deductions for 1 July 2019 for land acquired prior to the date or after that date. It does not apply to a company. It does not apply to a business. ie property development business or primary production business. It does apply to a unit, hybrid or discretionary trust or SMSF. The operative date is the date for deductions. Land already owned at this date is affected and not excluded.

This new measure strips away ability to claim deductions for holding "vacant land" however the provisions extends beyond just vacant land. Examples of affected costs are land tax, rates, interest etc The provisions may affect anyone who seeks to demolish a structure, build a new structure etc on the land or as the law states - Hold vacant land intended for future construction.

This law acts to deny deductions that were formerly permitted under the principles in Steele's decision. Steele's decision permits holding costs to be deducted where an owner constructs premises intended for future income producing use. The new law requires that the premises be completed and be available for rent with an occupancy certificate before deductions may commence.

This will affect isolated profit making intentions AND those who seek to construct new rental properties. The law contains provisions which align with the GST laws so that residential premises capable of occupancy under law AND be capable of being leased must exist on the land before deductions for holding costs become deductible. This will preclude vacant land leased for trivial purposes eg agistment, rental of a shed etc. the structure must be substantial and permanent and in use and capable of use to generate income.


The proposed law was modified from its original draft. The amended provisions allow for a three year time period to exclude a property that would be treated as vacant land due to a significant or unusual event or occurrence outside control of the owner eg a fire, flood, accident, asbestos, structural defect etc to the structure that is / was on the land. The modified provision will permit the deductions from the time of that event for three years. Events which do not affect the structure are ineligible eg financial difficulties of the owner, council refusal to approve etc.

Other modified rules have been added for land USED in a primary production business that produces income from its rental cost however for this provision to apply the owner must either be a company OR the land must be leased, hired or licensed to another entity. Primary Production Business takes its ordinary meaning in tax law and disregards agistment etc. It generally requires animal or plant cultivation and outputs.

The new law does not seemingly address the tax structure of a unitholder who borrows to acquire units in a fixed trust. The law applies where a trustee seeks to borrow. In the case of a unitholder where the borrowing is undertaken by the UNITHOLDER who buys units in a trust which seeks to construct or acquire income producing property this does not fall within the scope of the law. To that extent, that investor may be able to still claim interest deductions under the Steele's case principles for the interest where the trust is expected to produce future income. The trust may need to ensure it can meet this test by investing $100 in a interest bearing bank account so that $1 of income can be distributed.

The new law does not seemingly address another Steele's decision impact. A investor who seeks to contract to buy a property OTP or to buy an existing dwelling and who has an intention to use the premises in either case to produce future rental income may incur interest costs prior to settlement. eg on a deposit. The taxpayer is not acquiring or owning vacant land.

The option for investors to construct new dwellings will be impacted by this issue. A Granny Flat construction does not appear impacted BUT MAY be.

 

This states that it doesn’t apply to land held by corporations. I assume that I am safe as the only two currently “vacant” ie not substantial properties that I still own are held by my Pty Ltd company. I assume there is an exemption as Corporations pay capital gains and normal tax at the same rate so there is no value in making capital gains over income receipts.
Further there is no mention of owning the property with a dilapidated house that is leased. I consider myself a land banker more than a developer, I don’t see a provision that affects those not intending to increase the rental on the property.

Over 70 % of land in growth centres is in the same bracket of some $400-500 per week rent for a $3-6 million property. The word substantial really needs to be clarified to avoid confusion.

But it seems a fair and reasonable provision to close a loophole.

 

The corporate exemption isnt explained in the Bill. I wouldnt think the CGT issue is the relevant point but the issue of losses quarantined in companies is more typical and a company is a structure used for business style activities. And its lesser tax`rate ? The bill seems focussed on stopping neg gearing of the holding costs vs ordinary salary etc which wont occur with a company

The word substantial is used in respect of a dwelling / structure capable of occupancy etc on the land. The Commissioners opinion may be relevant.

A dilapidated house would require a valid occupancy certificate AND a arms length lease. It may not be valid or even still current !! I argue Part IVA also applies to this law. The ATO will likely seek to attack dubious claims for a lease on non-commercial terms. It seems unusual to rent a old house for $200 a week when it sits of $3m land and the property condition is an accepted issue. It looks and smells like landbanking. The key strategy is the structure. Company ownership poses no issue. The major issue is that of individuals who seek to offset the land loss v other income

 

Hmm, this is interesting, I was having a conversation about holding land in a company to build an investment property today as this is what we are doing and I was surprised when I learnt we could deduct the holding costs until the build is complete (I had previously assumed we would have to wait for the rental income to start..).

I guess for non company holders the holding costs can be added to the cost base of the land but that doesn’t give the tax payer any cash/tax benefits while holding the land. Is the Govt trying to crack down on land banking or just trying to balance their budget by grabbing the low hanging fruit? Or maybe both?

 

Both

 

Well the company can deduct holding costs but I ask this question - Does it have another source of income ? No ? So the loss would carry fwd anyway. This will assist income tax if a company profit is expected when it tenanted. And a company which does have another source of income may have an asset exposure concern.

 

Where I see the problems are that in land banking, ( by an individual) even the most substantial home provides less rent than the 2% land tax charged.
I recently sold an 8 bedroom 6 bathroom 20 car garage home for $10.6 on 5 acres and the market rent was only $900 per week.
the rent is below the land tax of $180k pa.
So in theory every home on acreage could fall within this parameter. I held this property for 12 years, so if losses were not claimable against other income it would hurt every acreage owner.

 

I saw also other land tax exemptions which may apply, including: boarding houses, low cost accommodation, residential, caravan parks, retirement villages, primary production land and childcare centres.

 

The intention of this law is to discourage land banking and whether its fair or unfair any past practices are not a permission for future claims. The degree of structure may need a ruling in many cases. Given its new law I expect the ATO will soon likely deliver some guidance

There is no commercial rent test in this law. The test applies to the structures upon the land. There is a also a mixed use concern to consider

 

It not vacant land, its a free range goat yoga business venture

 

So Superannuation 'funds' are exempt, but not SMSF's

 

Yes.