The House of Representatives recently passed a vital Taxation Amendments Bill. Once through the Senate and Royal Assent, the taxation of vacant land in Australia will substantially change.
Prior to the proposed changes, a taxpayer holding vacant land for the purpose of gaining or producing assessable income could claim a deduction for expenses like rates and interest on the land. Where the land produced no income, the deductions remained claimable where the intention of the taxpayer was to produce assessable income at a future point in time. In recent years the ATO has clarified its approach and require the taxpayer wanting to claim a deduction, to take active and genuine steps towards producing assessable income.
Amendments to the Law
Individual Taxpayers and some others will no longer be able to make deductions for the cost of holding vacant land except if the vacant land is:
- Used or made available for use by the taxpayer for carrying on a business. or
- Used or made available for use by the taxpayer’s affiliate, spouse or child or an entity affiliated either with or to the taxpayer in running a business.
This would generally exclude most farmland and business purpose property developments, to protect these taxpayers and allow them to continue to claim deductions for land holding expenses.
The new provisions address the treasury belief that some taxpayers have used the previous provision to claim deductions for expenses on vacant land, even when the land is not genuinely held with the aim of gaining or producing assessable income. The nature of vacant land makes it challenging to ascertain the real intent of taxpayers in holding such land.
IMPORTANT NEW FACTORS
For the purposes of this amendment, vacant land is a land with no substantial and permanent building or structure either in use or available for use. Such building or structure must have a purpose that is not merely incidental to the objective of another structure or proposed structure on the land.
Substantial and Permanent Structure
A substantial building or structure must be significant in size, value, or be of importance to the nature of the relevant property. A permanent structure must be fixed and enduring. While a structure is unlikely to stand forever, it is considered permanent where its purpose is not temporary.
Independent Rather Than Incidental Purpose
A building or structure must be independent and not incidental to any structure or proposed structure on that land. For instance, a residential garage is dependent and incidental to the main residential building and as such, does not qualify as a structure for the purposes of these new provisions.
Time at Which Land Must Contain a Structure
In order to claim deductions for land holding expenses, a structure must be on the land during the time the expense is incurred. In situations where there is a charge to the land which a taxpayer no longer holds, such expense can be deductible if the land was not regarded as vacant immediately before the taxpayer ceases to hold such land.
The amendment applies to the cost of holding land. Current borrowing cost, including interest payment on the loan used in acquiring land, are regarded as holding costs. Land taxes, council rates, and maintenance costs are other examples of holding costs.
Past Business Use
Holding costs are deductible when incurred on land relating to a time when previously held or made available for business use. These are deductible even when incurred after the business use ceased, but must relate to the time the land was used for business purposes.
Residential Land with Building Plans
Land not containing residential premises are regarded as vacant. Such land with building plans in place is not exempted from the amendment. For the amendment to be not applicable, the land must contain residential premises able to be occupied, leased, or made available.
The amendments do not apply to restrict deductions for land holding costs where the land holder is:
- A corporate tax entity
- A superannuation plan ( but not a self-managed superannuation fund)
- A public unit trust
- A managed investment trust
- A partnership or unit trust if every member is an organization included in this list
Denied Deductions for Future Years
Losses and outgoings in an income year which these amendments have made not deductible, will also not be deductible in coming years, effectively preventing the carry forward of these losses. However, the unclaimed costs can form part of the cost base of the property for Capital Gains Tax purposes.
Applications and Transitional Provisions
The amendments take effect from the first quarterly period after the day of Royal Assent of the Bill. Starting from the 1 of July 2019, the amendment becomes applicable to losses and outgoings incurred on land even if they were first held before this date.
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