22 October 2018
The Government released on 15 October 2018 Exposure Draft legislation to deny certain deductions for expenses associated with holding vacant land incurred from 1 July 2019 (regardless of whether land was held before that time). This measure was announced in the 2018-19 Budget, as mentioned in our Budget Tax Brief dated 8 May 2018. It addresses concerns that deductions are being improperly claimed for holding vacant land where the land is not genuinely being held for the purpose of earning assessable income.
There are some important exceptions.
The denial will not apply to the extent the land is being used to carry on a business for the purpose of producing assessable income of the land holder (which would include lessee’s who hold the land under a lease), or the land holder’s affiliate (or entity of which the holder is an affiliate), spouse, children under 18, or an entity connected with the holder. Therefore, a land holder should be able to claim deductions in relation to vacant land leased to such related parties who use the land for, say, primary production. However, if vacant land is leased to an unrelated third party, then the lessor will need to be able to demonstrate that the leasing of the land itself was the carrying on of a business for the purpose of gaining or producing the assessable income in order to be able to claim deductions. This is regardless of whether the third party uses the land in carrying on a business.
Also the measure does not apply to:
- corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts: or
- unit trusts or partnerships, if all the members of the trust or partnership are those listed in (a) above.
This measure could therefore apply to deny deductions for expenses associated with vacant land held via a discretionary trust with the intention of building a rental property where the discretionary trust is not carrying on a development business and the land is not otherwise being used to carry on a business (for example, to carry out a primary production business).
In order to be considered vacant, there must be no substantive permanent building or permanent structure on the land that is in use or ready for use. For this purpose, the amendments propose that a residential premises which has been constructed or renovated while the land is held will be covered by the measure unless the premises is lawfully able to be occupied and the premises is leased, hired or licenced, or available for such. This would not be required for commercial (non-residential) developments.
It is also contemplated that expenditure associated with only part of a property may be subject to this measure. This will depend on the use of each part of the property.
Expenses of the holder for which deductions will be denied that would ordinarily be a cost base element (such as borrowing expenses and council rates) may be included in the cost base of the asset for CGT purposes.
Consultation on these amendments is open until 31 October 2018.