Stricter Terms for Availing Deductions on Vacant Land
Before the Treasury Laws Amendment Bill 2019 was enacted, the cost for holding a vacant property was largely deductible. According to the ATO’s guidelines, deductions can be applied on the vacant land that’s intended to be developed in the future for income-generating purposes.
Holding the vacant land can’t be regarded yet as capital in nature since the income-producing activity hasn’t started yet. However, this context has made compliance with administrative rules harder to enforce since they rely on the landowner’s claim on how the land is intended to be used.
The new law was enacted to preserve the integrity of what a vacant land is and prevent taxpayers from claiming deductions on vacant properties that may not really be intended for an income-producing development.
Definition of a Vacant Land
According to the ATO, vacant land is defined as a property that doesn’t have any permanent or substantial structure in it. Structures that have an independent function or purpose are categorized as substantial. Examples of substantial structures are farm homesteads, commercial parking complexes, grain silos, and woolsheds.
On the other hand, residential landscapes, pipes and powerlines, residential garages, and letterboxes aren’t categorized as substantial and permanent structures. Vacant land with these kinds of installations can still be subjected to deductions.
Vacant land can still be considered for deductions even if it has a substantial and permanent structure, so long as the structure is part of the residential premises and was constructed or renovated while it’s still in your care. The structure must also be unoccupied and is not available for rent or lease.
The usual deduction will still apply on vacant lands if any of the following situations apply:
- The land is held by corporate tax entities, public super funds other than SMSFs, managed investment trusts, or public unit trusts.
- The land is used for business and it’s owned by you, your fiancé, your child who is at least 18 years old, or an entity affiliated with you.
- The land is made available through arm’s length leasing arrangement with the entity carrying business on the property.
- The landowner may be eligible for deductions for up to 3 years in case the vacant land becomes unusable due to natural disasters or uncontrollable circumstances like fire. In a residential building, this may include the discovery of a major defect that renders the structure unsafe to use.
- The land is leased to another entity and you or any exempted entity is carrying out a business of primary production.
Deductions not included under the new law are costs paid on repairs and maintenance, land tax, interest, and interest on loans. These non-deductible holding costs, though, may be included in the base cost for computing the capital gains tax on the property.
The rules apply in retrospect to expenses made from 01 July 2019. Landowners who have already entered development agreements for their vacant land assets must review the impact of the new rules on the operations and costs on the upcoming business.
Investors who have bought vacant land with concrete plans to use it for commercial purposes will most likely be heavily impacted by the new law. The ineligibility to apply for deductions while the land is idle and under the development phase of the project can be costly to businesses.