Vacant land deduction changes hit 'Mum & Dad' property developments
Legislation passed through Parliament in October 2019 that prevents taxpayers from claiming deductions for expenses incurred for holding vacant land-and not only is the legislation retrospective, it goes beyond purely vacant land.
In the past, 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.
New laws that passed through Parliament in October-aimed predominantly at individuals, closely held trusts, and SMSFs)-prevent deductions being claimed by Mum and Dad investors. The new laws apply retrospectively to losses or outgoings incurred on (or after) 1 July 2019, regardless of whether the land was held. There are no grandfathering measures in place, which means that the amendments not only impact those intending to develop vacant land, but also those who have already acquired the land to develop.
This legislation builds on previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.
It's more than vacant land for residential purposes-it may impact land with buildings on
The changes go beyond purely vacant land for residential purposes as deductions could also be denied for land with a building on it, if that building is not 'substantial'.
The problem is that 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.
Impacts on the cost base
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.
Are there any positives in this legislation?
There are some positives: 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.
Contact us for more information
If you are not sure about the impact these changes will have on your position, please contact us on 02 9957 4033.
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.