Ron Jorgensen

Denial of Tax Deduction For Vacant Land Legislation Released

Ron Jorgensen

July 26, 2019

Tax Deduction

On 24 July 2019, the Government introduced legislation to enact the Federal Budget denial of tax deduction for vacant land integrity measures.

Property developers, property investors and primary producers will need to review the landholding usage, contractual arrangements and business plans to ensure tax deductions are not denied from 1 July 2019.

Federal Budget

On 8 May 2018, the Federal Budget announced integrity measures to deny tax deductions for holding vacant land.

 

 

 

The Government will deny deductions for expenses associated with holding vacant land. This is an integrity measure to address concerns 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. It will also reduce tax incentives for land banking, which deny the use of land for housing or other development. This measure will take effect from 1 July 2019.

Denied deductions will not be able to be carried forward for use in later income years. Expenses 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 capital gains tax (CGT) purposes when sold. However, denied deductions for expenses that would not ordinarily be a cost base element would not be able to be included in the cost base of the asset for CGT purposes.

This 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.

This measure will apply to land held for residential or commercial purposes. However, the ‘carrying on a business’ test will generally exclude land held for commercial development.

This measure is estimated to have a gain to revenue of $50.0 million over the forward estimates period.

With the 2019 Federal election, it was unclear if this integrity measure would proceed.

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (Cth)

On 24 July 2019, the Government introduced Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (Cth), which was referred to the Senate Economics Legislation Committee for a Report by 5 September 2019.

Relevantly, from 1 July 2019 income tax deductions to taxpayers (other than corporates, non-SMSF superfunds, MITs, or PUTs or their subsidiary unit trusts or partnerships) will be denied for losses and outgoings incurred in holding vacant land (without an independent substantial and permanent structure in use or available for use (ignoring lawfully occupied residential premises that are not leased/hired/licenced or available for lease/hire/licence)), regardless of when acquired, to the extent the land is not at the time of incurring the expense or outgoing (sec. 26-102 ITAA 1997):

  1. used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or
  2. used or held available for use in carrying on a business by:
  • an affiliate, spouse or child of the taxpayer; or
  • an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.

Affiliates and connected entities are defined (sec. 328-125 and sec. 328-130 ITAA 1997).

https://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r6369_first-reps/toc_pdf/19129b01.pdf;fileType=application%2Fpdf

https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6369_ems_1b26c75b-2a79-4a14-b95c-78d88f25273b/upload_pdf/712910.pdf;fileType=application%2Fpdf

Commentary

Some observations made in the Explanatory Memorandum are:

  1. Deductions are denied from 1 July 2019 regardless of when the land was acquired (no grandfathering).
  2. The land is assessed on each separate title.
  3. Apportionment of deductions is required for mixed business use and vacant use land.
  4. The structure must be independent (separate and not incidental purpose to other structures), substantial (size, value or importance) and permanent (fixed and enduring).
  5. The structure must exist at the date the holding costs (rates, land tax, repairs) or expense (finance interest) is incurred or is referrable.
  6. A structure is not required where the land is used or held for use in carrying on a business (property development business or primary production business) by the owner or an affiliate or connected entity.
  7. Land is vacant until the structure is lawfully able to be occupied and used or available for use (e.g. no deduction during construction).
  8. Land is vacant if the structure is not actively leased/hired/licenced or available for lease/hire/licence

For property developers, deductions will likely be denied where the land is recorded as capital or is not subject to a future development program because the land must be actively used or held ready for use in a property development business.

For property investors, deductions will likely be denied prior to construction, issue of certificate of occupancy and the premises are listed for lease/hire/licence or subject to a lease/hire/licence or agreement for lease/hire/licence.

For primary producers, deductions will likely be denied where primary production activities (that do not constitute a primary production business) such as agistment, hobby/lifestyle farms or small scale farms (and possibly share farming) are being conducted.

Property developers, property investors and primary producers will need to review the landholding usage, contractual arrangements and business plans to ensure tax deductions are not denied from 1 July 2019.