Effective from 1 July 2019 individuals, trusts and SMSF’s will be denied a tax deduction for the costs of holding vacant land in certain circumstances. The new rules will not apply to companies.

Previous tax law allows those who hold vacant land to claim a tax deduction for the costs of holding the land if it is held for either income-producing purposes or if carrying on a business to produce income.

Under the new law, a deduction for the costs of holding vacant land will be limited to land (or significant structures on the land) that are used in a business or available for rent.

The new law applies to costs incurred on or after 1 July 2019, regardless of whether the land was held prior to this date.

Holding costs include ongoing borrowing costs, interest incurred for loans to acquire the land, land taxes, council rates and maintenance costs. Where only part of the land is used for a business purpose, then apportionment is required on a fair and reasonable basis.

Costs which are not deductible as a result of the tax law changes may be included in the cost base of the asset for CGT purposes which will give relief against any taxable gain when the asset is sold.

There are exclusions to the rules in that a deduction will not be denied for holding costs to the extent that they are incurred in carrying on a business (eg a property development or primary production business) by the taxpayer. The exclusion also covers land which is held available for future use in a business and therefore provides relief for property developers holding vacant land for future development.

Special rules also apply when determining whether land that contains residential premises is vacant. Land will be treated as remaining vacant for the purposes of these new laws until the residential premises are (or are available to be) leased, hired or licensed. This means that a taxpayer cannot deduct the costs of holding land containing residential premises (or construction thereof) until they are actively seeking to derive income from its use (available for rent and placed on the rental market).

The new laws may adversely impact individual or trusts who borrow to invest in residential property as to the loss of up-front tax relief can have unfavourable cash-flow and financial implications.

Whilst companies are not subject to the new laws, and therefore on the surface look an attractive structuring alternative, the loss of the 50% CGT Discount that individuals and trusts are entitled requires specific consideration.

The new rules are not retrospective but also don’t have any grandfathering provisions to protect taxpayers who have already committed to a structure and investment path.

For more information on the new tax law and how they may impact your circumstance please contact your Davidsons team member or email Justin McGrath on justinm@davidsons.com.au.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.