Federal Budget 2018

No Deductions For Vacant Land

Date of effect| 1 July 2019

Deductions will be denied for expenses associated with holding vacant land. The Government is concerned that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. They expect the measure will also help to prevent 'land banking', which denies the use of land for housing or other development. 

Denied deductions will not be able to be carried forward for use in later income years. However, expenses which cannot be claimed as a deduction can form part of the CGT cost base of the property as long as they fall within specific categories (such as interest, borrowing expenses and council rates). 

This means that the expenses can reduce a capital gain made on future sale, although there are limitations on this which mean that holding costs cannot create or increase a capital loss and cannot generally be taken into account if the property was acquired before 20 August 1991. 

The measure will not apply to expenses associated with holding land that are incurred after: 
  • A property has been constructed on the land, it has received approval to be occupied and is available for rent; or 
  • The land is being used by the owner to carry on a business, including a business of primary production.
The measure applies to land held for residential or commercial purposes. However, the 'carrying on a business' test will generally exclude land held for commercial development.

Unfortunately, it appears that this measure may impact on those who incur holding costs in relation to land that is genuinely held for the purpose of producing assessable income, including where the owner is actively constructing a dwelling on the land that will be used as a rental property (Steele's case and ATO ruling TR 2004/4 deal with this area). This is another example of where those doing the right thing will be impacted by the Government becoming fed up with those who aren't.

It also remains to be seen how holding expenses that relate to land held as trading stock will be dealt with under the proposed changes.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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