When will S.26-102 deny deductions for costs of holding vacant land?
Broadly, S.26-102 denies deductions for otherwise deductible holding costs incurred by a taxpayer to the extent they relate to holding ‘vacant land’. As discussed above, this will apply to losses or outgoings incurred on or after 1 July 2019, regardless of when the land was acquired. In this context, the relevant area of land is the land to which the holding cost expense relates and, in most instances, this will be the land covered by a single property title. Paragraph 3.16 of the EM states by way of example, that if an entity becomes liable to rates in respect of a property, the relevant area of land is the property that is the subject of the rates notice.
The EM also highlights, however, that in other instances, a particular loss or outgoing may relate to only part of the land covered by a title or to land covered by multiple titles.
TAX TIP – Denied deductions may be added to cost base
Any outgoings that are not deductible under the new rules cannot be carried forward and deducted in later years, however, they may be included in the property’s cost base for CGT purposes. Generally, non-deductible holding costs form part of the third element of an asset’s cost base under S.110-25(4) but only if it the asset was acquired after 20 August 1991.
This treatment highlights the significant cash flow impact of the new ‘vacant land’ provisions, where applicable, as the benefit of making a lower capital gain (due to having a higher cost base) is only realised when a CGT event occurs (e.g., the land is sold).
Furthermore, the full benefit of having a higher cost base may not be achieved. For example, this may occur where a capital gain made on disposal of ‘vacant land’ is reduced or eliminated under one or more CGT concessions (e.g., the general discount or small business 15-year exemption). In this case, the benefit of realising a lower capital gain is eroded to the extent a CGT concession applies. Additionally, if the land was acquired on or before 20 August 1991, any deductions denied under the new rules will also not be taken into account for CGT purposes (i.e., as third element costs) thereby leaving the taxpayer worse off.
Non-deductible holding costs will not form part of the reduced cost base of the property. Accordingly, the non-deductible holding costs cannot create or increase a capital loss made on the property.