On 28 October 2019, the amendment on the provisions governing deductions with respect to owning vacant land received royal assent. The amendment denies owners of vacant land the ability to claim tax deductions for the holding costs even if it is held for income-producing purposes. So, if you (individuals, your trusts, and/or you self-managed superannuation funds) intend to purchase vacant land with the intention to build a house to rent out, this law affects you.
The costs in question include interest on loans taken out to acquire the land, borrowing costs, land taxes, rates and maintenance costs. These costs now need to be capitalised (not deductible) beginning 1 July 2019, regardless of whether the land was held before this date. They will now form part of the cost base of the land which will only give relief against any capital gain when the taxpayer eventually sells.
First off, what makes land vacant? According to the Australian Taxation Office (ATO), land is considered vacant if:
- At the time the expense was incurred, the land did not contain a substantial and permanent structure; or,
- The land did contain a residential structure, the premises is not lawfully able to be occupied, or it is not rented out or made available for rent.
There is, as always, an exception to this rule. The costs will not be denied when you incur them because you (or your affiliates, or spouse or child, or an entity connected to you) carry on a business (for example, property development or primary production). However, a special rule applies to land where residential premises are planned to be built on it. The land remains to be considered vacant until the residential premises are (or becomes available to be) leased, hired or licensed. This means that you cannot deduct the holding costs until you are actively seeking income from its use.
This law will likely have cash flow and financing impacts on your plans to acquire real estate as a result of the deferral of the tax relief that previous was immediate. If you have concerns relating to the new law and how it may affect you, please do not hesitate to call our office at (07) 5451 1118.