Proposed Change to limit tax deductions on vacant land.

If you have purchased a block of vacant land in the past, you may be entitled to claim certain deductions for expenses incurred in holding the land. This is available to you if you can show that you have taken “active and genuine steps” to build a rental property on the purchased land, and have the property available for rent as soon as it is completed.

Some of these expenses which are currently available to be claimed include: loan interest, council rates and other outgoings. These deductions ultimately enabled individuals to claim deductions with no income being generated from the property, the property potential being highly negative geared during the year. This lead to better tax outcomes [i.e. refunds] for the property owners.

However with the introduction of Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 to parliament on 24 July 2019, Schedule 3 of the bill is desired to limit previously allowable expenses incurred on holding vacant land

What is “vacant land”?

Vacant land is defined under s. 26-102(1) as having no substantial and permanent structure in use or available for use on the land. This structure can include a building or other type of assembly constructed on site.

What classifies a “substantial and permanent structure?”

Substantial and permanent structures are described as needing to be “significant in size, value or some other criteria of importance in the context of the relevant property”. A permanent structure must not be built for temporary purposes, however it is not expected the building or assembly remain on the land indefinitely.

I have an acceptable structure on my land, when are my expenses deductible?

The land must hold the structure at the time the loss or expense has incurred. If expenses are incurred after you have sold the land (such as interest paid on loans), the outgoing may be deductible as long as the structure on the land was not removed immediately before the taxpayer sold the property.

What does this mean for me?

If the bill is passed by parliament it will commence on 1 January, 1 April, 1 July or 1 October after the bill receives Royal Assent.

This means if you currently own or are looking to purchase vacant land with the intent of building an investment or other income producing activity on the property, you may no longer be able to claim expenses incurred in holding the land [Unless you have a structure as described above].

Any expenses unable to be claimed at the time of the outgoing can be added to the cost base of the asset, this will reduce the capital gain should you sell the investment property in the future.

If you would like further clarification on the above or require assistance get in contact with us, we are here to help. Please feel free to call Craig Hailston at our office.