The bill is progressing through parliament now to deny interest deductions on vacant land

From the explanatory memorandum

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.

 

Does this also apply during the build phase? e.g. at framing stage, is that considered a substantial/permanent structure?

 

yes - if the law gets pased

 

Meaning of substantial

3.18 To be substantial, a building or other structure needs to be significant in size, value or some other criteria of importance in the context of the relevant property. [Schedule 3, item 3, subsection 26-102(1)]

3.19 Whatever makes the structure substantial must be a feature of that particular structure – a structure is not substantial if it only has value as an adjunct to another structure. For example, a letterbox would not be substantial and a residential garage would be unlikely to be substantial.

Framing during the building phase might not be substantial. Will have to ask my tax lawyer friends their thoughts. Good question

 

Probably answered here

3.29 Even where land is vacant (i.e. does not contain any structures) these amendments do not deny deductions to the holder of the land for the costs of holding that land to the extent that they are incurred in:

• carrying on a business by the taxpayer (for example a property development or primary production business); or

• holding land that is used or made available for use in carrying on such a business by certain entities related to the taxpayer.

If you were doing it as a business then no issues.

If it was building a rental property then probably an issue

 

Remember as well companies are excluded from these amendments

 

My understanding is that the interest won't be deductible until there is an occupancy certificate - and this is for capital account and not for revenue account holders or companies.

But will wait for the law to be passed before panic sets in.

 

Not far off

 

This could have significant ramifications for developers intending to hold on to the finished product correct? Particularly if land holding and build time-frames are extended and held within a trust or non-trading entity.

 

Ridiculous.....that they want to deduct interest BUT....if you make a profit on this land.....they still want to charge you capital gains taxes - WTF??

 

I had always assumed this was the case. The interest cost would become part of the cost base and your ultimate CGT would be based on the sale price less the initial cost and interest costs.

 

The proposed law seeks to strip common law ability to claim property deductions ahead of rental income (eg Steele's decision). It was identified by state and Commonwealth govt as a way to temper the demand for vacant land by quazi-developers who were cutting first home buyers etc from buying homes. Treasury flagged that the value of deductions for property not yet available to occupy was vastly increasing year on year and by removing tax incentives it may limit inflationary impacts of new builds and land.

The law change isnt intended to impact true developer business activities. It is intended to impact isolated profit making or passive property investors seeking to build new stock

There is no grandfathering in the Bill. It was announced in the 2018 budget and was delayed by the election. The start date is 1 July 2019 however there appears a requirement that the Treasurer must make a regualtion that specifies the start date. It could be a quarter after the Bill is given assent...Its not pased yet so nobody knows.

I have clients who do PAYG Withholding variations who claim such deductions for interest on property under construction to be retained and rented in the future. Our advice at this time is to NOT include those deductions in a 2020 withholding variation until the bill is made law and the start date confirmed. It is probable that some or all the deduction may be denied.

 

Hmmm...Probably GST and income tax and CGT never was a concern. The definitions align with the "new residential premises" test in GST laws for tighter alignment. You cant strat with vacant land, throw a slab down and some framing then start to claim since there is a structure. The structure must be completed and have a occ cert etc and be capable of occupancy and available for occupancy to start interest deductions etc. Otherwise, the interest would be allowed as a reduction to the profit of course. It is deferred to match against the income from the sale. It cant be used to negatively gear, as such.

The land banking description is both overly simplistic and obvious. But the true application is far far broader.

The Bill is expected to be before the next session in the next few weeks and pass. Nobody has so far proposed any changes.

 

Nah grandfathering in tax is old school.....the same way the screwed over expats when they changed the rules overnight and removed the 50% LTCG discount a few years back even though we bought our properties years before.......

(Dont feel like its ATO only - the IRS screwed us green card holders with a tax change in 2008 in a just as drastic way and people wonder why citizens are giving up citizenship etc).

 

Are Australian citizens really giving up citizenship (other than in cases where they take up citizenship of another country that doesn’t allow dual citizenship)? - interested in these stats.

 

think Dean is referring to US citizens who are expatriating themselves (ie giving up their citizenship) so they dont need to be taxed on their worldwide income. Eduard Sauverin did this to avoid taxes in the US and was a major impetus for changes in tax laws there.

Im not aware of Australians giving up their citizenship

 

I think it is not possible to give up Australia citizenship as it is automatic

 

Tracey Dunn from RSM has written a very good article on this matter

Negative Gearing of Vacant Land - is this the beginning of the end?

 

Yes i am referring to Americans who are taxed on worldwide income.

And yes Australians could just "leave the country" to escape ATO citizenship on non-Aust income.

This said....in the USA Heart Taxation Act started in 2008 - Facebook didnt IPO until 2012, Eduardo was claimed to be moving for tax reasons but the press and politicians never bothered to point out he actually had to pay capital gains on his assets on the day he left the USA.
Its a bit of a case of all BS and no one actually bothered to report the truth.

I should have said "giving up citizenship AND residency"