On 15 October 2018, the Federal Government introduced exposure draft legislation (Treasury Laws Amendment (Measures for a later sitting) Bill 2018: Limiting deductions for vacant land) to improve the integrity of the tax system by denying certain deductions for expenses associated with holding vacant land. The exposure draft Bill amends the Income Tax Assessment Act 1997 (Cth) to deny deductions for losses or outgoings incurred to the extent they relate to a taxpayer holding vacant land.
However, the proposed amendments do not apply to any losses or outgoings relating to holding vacant land to the extent that:
- they are necessarily incurred by the entity holding the land in the course of carrying on a business in order to earn assessable income; or
- 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, is carrying on a business on the vacant land.
The proposed amendments do not apply to corporate tax entities, managed investment trusts, public unit trusts and unit trusts.
The proposed amendments are intended 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.
Public consultation on the exposure draft legislation will close on 31 October 2018.
We note the following matters have been explained in the Explanatory Materials for the Bill.
Land is considered vacant if there is no building or other structure on the land that is substantial and permanent and in use or ready for use. In this context, land does not have to refer to the whole of the land on a property title but could refer to just part of the land.
Holding cost of vacant land incurred in carrying on a business
Unless the proposed amendments apply to the costs of holding land, the proposed amendments do not deny deductions to the holder or the costs of holding that land to the extent they are incurred in the carrying on of a business by the taxpayer or certain entities related to the taxpayer. For example, the amendments will not apply to a property developer that holds land for the purposes of carrying on a business.
The proposed amendments also apply separately to any costs incurred by the lessee in relation to their interest in the land as the lessee is also considered to hold the land under the terms of the lease.
Land treated as vacant until residential premises exist on the land
Under the proposed amendments, a special rule applies to land that contains residential premises within the meaning of the GST Act. Such structures are disregarded and the land is treated as remaining vacant for the purposes of these amendments until the residential premises are:
- able to be occupied under the law; and
- leased, hired or licensed or available for lease, hire or licence.
This means a taxpayer cannot deduct the costs of holding land containing residential premises until the taxpayer is actively seeking to derive income from the property.
Denied deductions for cost base expenses included in the cost base
Losses and outgoings that are not deductible in an income year as a result of the proposed amendments are not able to be deducted in later years. However, they may be included in the cost base of the asset for CGT purposes, resulting in a corresponding reduction in any capital gain when a CGT event happens.