In brief:

On 15 October 2018 the government released Exposure Draft Legislation that limits deductions for vacant land. The Draft Bill amends the Income Tax Assessment Act 1997 to deny deductions for losses or outgoings incurred to the extent they relate to a taxpayer holding vacant land.

What you need to know:

Current tax laws allows tax payers to claim costs of holding vacant land if it’s held for the purpose of gaining or producing assessable income or carrying on a business for the purpose of gaining that income.

As the land is vacant, there is often limited evidence of the taxpayer’s intention and some taxpayers have been claiming deductions when it is not genuinely held for the purpose.

There are however some important exceptions. The amendments do not apply to any losses or outgoings relating to holding vacant land to the extent to that:

  • they are necessarily incurred by the entity holding the land in the course of carrying on a business including where an affiliate, spouse or child of the tax payer or an entity that is connected with the taxpayer is carrying on a business; or
  • the tax payer(s) consist of corporate tax entities, superannuation plans (other than self managed superannuation funds), managed investment trusts or public unit trusts including unit trusts or partnerships of which all the members are entities of the above types.

The reference ‘to the extent that’ ensures that the amendment does not exclude the whole area of land from the principle because a small part of the land is being used for carrying on a business. For example, where the business is operated on one part of a property but the rest of the property is unoccupied, the entity can only claim a deduction for the cost of holding the land that is used to carry on the business, not the costs of holding the entire property.

Conclusion:

These amendments do not deny absolute deductions to the holder of vacant land and various exceptions apply. The measure is planned to apply to losses and outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date. Treasury is consulting on the draft legislation until the end of this month.