Parliament passed legislation last month that will prevent taxpayers being able to claim deductions for expenses that were incurred when holding vacant land. The amendments are not only retrospective but go further than solely vacant land.
Past and New Rules
Previously, if you had purchased vacant land intending to build an investment property on the land, then expenses incurred for holding the land (council rates, loan interest, etc) may have been able to be claimed as tax deductions.
The new laws will prevent these types of deductions from being claimed. Mum & Dads (individuals, closely held trusts and SMSFs) are the people that the new laws will affect the most. As the new laws will apply retrospectively to outgoings or losses incurred on or later than 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, these amendments not only impact those that are intending to develop the vacant land but also those that have already acquired the land for development. It is the same target as previous tax changes that denied travel claims for visiting residential rental properties and claims for depreciation for plant and equipment in some residential rental properties.
It Goes Beyond Just Land
The changes however, go beyond purely vacant land for residential purposes. Deductions could be denied also for land with a building on it, if it is deemed that the building is not ‘substantial’. The problem is that legislation does not clearly state ‘substantial’ definition.
A shearing shed or silo would be substantial, but a residential garage would not meet the test from what the bill suggests.
It May Reduce GCT
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.
Exclusions
On a positive note, if the vacant land is leased to a third party under an arm’s length arrangement it may continue to meet eligibility for deductions for the holding costs after 1 July 2019 if the land is being used in a business activity. Also, primary production land used in business will generally be excluded from the new rules. However, if there are residential premises on the land already or they are being constructed on the land then deductions could still potentially be lost (at least to some degree).
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 will not apply if you (or certain related parties) are carrying on a business on the land or the land is owned by superannuation funds (other than SMSFs), companies, certain public trusts or managed investment trusts.
At Accorti Accountants +Advisors we can help you understand and navigate the property and tax issues to help you achieve your goals.
We work with clients all over Australia and have offices in Brisbane and the Gold Coast. If you have any questions or need help please contact us now to discuss land and property tax.
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