Vacant land deduction changes hit ‘Mum & Dad’ property developments

December 10, 2019

Legislation has recently passed through Parliament which prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land and will certainly affect Mum & Dad property developments.

Previously, if you bought vacant land with the intent to
build a rental property on it, you may have been able to claim tax deductions
for expenses incurred in holding the land such as loan interest, council rates
and other ongoing holding costs.

The new laws, aimed predominantly at Mum & Dads (individuals,
closely held trusts and SMSFs), prevent these deductions from being claimed.
Since the new laws apply retrospectively to losses or outgoings incurred on or
after 1 July 2019 regardless of whether the land was first held prior to this
date, and with no grandfathering in place, the amendments will not only impact
those intending to develop vacant land but those who have already acquired land
to develop. This is the same target as previous tax changes that denied travel
claims to visit residential rental properties and depreciation claims on plant
and equipment in some residential rental properties.

The changes however, go beyond purely vacant land for
residential purposes. Deductions could also be denied for land with a building
on it, if that building is not ‘substantial’. The only problem is, the
legislation does not clearly define what ‘substantial’ means. The Bill suggests
that a silo or shearing shed would be substantial but a residential garage for
example, would not meet the test.

If the new measures prevent holding costs from being claimed
as a deduction, then they will generally be added to the cost base of the asset
for capital gains tax (CGT) purposes. This means that they can potentially
reduce any capital gain made when you dispose of the property in the future. However,
holding costs for CGT assets acquired before 21 August 1991 cannot be added to
the cost base and these costs cannot increase or create a capital loss on sale
of a property.

On the positive side, vacant land leased to third parties
under an arm’s-length arrangement may continue to be eligible for deductions
for holding costs after 1 July 2019 if the land is used in a business activity.
Also, land used in a primary production business will generally be excluded
from the new rules. However, deductions could still potentially be lost (at
least to some extent) if there are residential premises on the land or that are
being constructed on the land.

There are also carve outs for land which has become vacant or which cannot be used to produce income for a period of time due to structures being impacted by natural disasters or other events beyond the owner’s control. The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

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