Tax Tips for Property Investors: Deductions for Vacant Land

In July 2019, there were changes made to the legislation to limit deductions that can be claimed for holding vacant land. These changes have confused many investors, and while many deductions are no longer available – many still are. To find out more about this limit, contact us here. 

To summarise: deductions for vacant land are still available if you buy vacant land with the intent to build a rental property on it.

What is vacant land?

Your land is considered vacant if, at the time you incurred the expense, the land:

  • Did not contain a substantial and permanent structure*, or
  • Contained a substantial and permanent structure that is residential premises, but the premises
    • Could not lawfully be occupied, or
    • Was not rented out or made available for rent.

*Substantial and permanent structures

Structures that are substantial and permanent include:

  • A commercial parking garage complex
  • A woolshed for shearing and baling wool
  • A grain silo
  • A homestead on a farming property

 

Structures that are not substantial and permanent include:

  • A residential garage or shed
  • A letterbox
  • Pipes and powerlines
  • Residential landscaping 

 

These provisions do not impact the costs associated with constructing a rental property. However, interest on the land component would only be deductible when the property can lawfully be occupied and is made available for rent.

Vacant land deductions are still available if:

Not to worry, though – you can still deduct vacant land holding costs if the following apply:

  • The land is held by an ‘excluded entity’, that is a
    • Corporate tax entity
    • Superannuation plan (other than a self-managed superannuation fund)
    • Managed investment trust
    • Public unit trust
    • Unit trust or partnership of which all the members are corporate tax entities, superannuation plans, managed investment trust or public unit trust
  • The land is used to carry on a business by 
    • You
    • Your affiliate or an entity of which you are an affiliate
    • Your spouse or child under 18 years old
    • An entity connected with you
  • You, an affiliate (as listed above), a spouse or child, or an entity connected with you, are carrying on a business of primary production and the land is leased or hired to another entity
  • You make the land available at arm’s length to a business for use in that business
  • A substantial and permanent structure was on the land, but an exceptional circumstance occurred that resulted in the land becoming vacant.

Vacant land and CGT considerations 

Under the existing CGT law, holding costs that are not deductible may be included in the asset’s cost base to reduce the amount of capital gain that arises when a CGT event occurs. 

The types of expenses that may be included in the cost base are those that are ordinarily included in the asset’s cost base, such as:

  • Interest expenses
  • Rates
  • Stamp duty or other similar duty. 

 

Even with all these changes, vacant land deductions can still be claimed – so long as the intent to build for renting purposes is still intact. 

If you’re looking for more investment property information – check out the other parts of ourTax Tips for Property Investorsseries or get in contact with us here for a personalised tax assessment or property portfolio review.

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