New exception under S.26-102(9) applies regardless of who is carrying on a business on the vacant land, given that all of the criteria are met
This serves as an extension of the ‘carrying on a business’ exception. According to S.26-102(9), it gives relief for vacant land used or available for use in any business (i.e., not specifically the taxpayer’s or a specified related entity’s business) provided that the land is rented on an arm’s length basis.
Since the previously discussed ‘carrying on a business’ exception is only applicable when the business is carried on by the landholder or a specified related entity, this new exception under S.26-102(9) applies regardless of who is carrying on a business on the vacant land, given that all of the following criteria are met:
- The (vacant) land is under lease, hire or licence to another entity (whether related or otherwise) as a result of a dealing at arm’s length.
- The land is in use, or available for use in carrying on a business (i.e., any business, carried on by any taxpayer).
- The land does not contain residential premises.
- Residential premises are not being constructed on the land.
This extension aims to provide sanctuary for taxpayers who are renting out vacant land legitimately, so that they are able to offset their otherwise deductible holding costs against any assessable income generated by them.
However, in order for this exception to apply, while the parties to the lease arrangement may either be related or unrelated, it must be entered into on an arm’s length basis (i.e., it must be consistent with what independent parties in the same situation might agree). Example:
Party A owns a vacant block of land, which is going to be leased to party B (not related to party A) on an arm’s length basis, as a carpark to be used in party B’s current business.
Can party A claim deductions for holding costs incurred in relation to the block once it is leased to party B?
- Yes. The lease agreement is entered into on an arm’s length basis and the land is used in carrying on a business; which means that party A can offset any otherwise deductible holding cost against the rental income he receives.