On 28 October 2019, the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Act 2019 implemented provisions aimed at limiting income tax deductions for ‘vacant land’ (broadly being any land upon which there is no eligible substantial and permanent structure in use). For many property owners, these new rules will seriously impact cash flows, particularly when constructing and substantially renovating rental properties and/or business premises.
To the extent the holding costs of ‘vacant land’ (e.g., interest, rates, insurance, land tax and maintenance costs) would be deductible (i.e., under S.8-1 of the ITAA 1997) with respect to a property either being used (or intended to be used) to gain or produce assessable income, new S.26-102 of the ITAA 1997 denies those deductions if, at the time they are incurred, there is no eligible substantial and permanent structure on the land (subject to a number of exceptions).
This new ‘vacant land’ measure applies to costs incurred on or after 1 July 2019 (i.e., from the 2020 income year) that relate to holding land, even if the land in question was first held before that date. Importantly, the use of the term holding land means the amendments are not limited to the owner of the land. As a result, this provision could equally apply to a lessee as they would be considered to hold the land under the terms of the lease.
‘Carrying on a business’ exceptions for vacant land
A key purpose of the new rules is to overcome the compliance and administrative difficulties when having to rely on a taxpayer’s assertion about their intentions as to whether or not they are holding vacant land genuinely to derive assessable income.
Importantly, however, the new provisions include (amongst other exceptions) a ‘carrying on a business’ exception. This exception means that S.26-102 will not apply to the extent that the ‘vacant land’ is used, or available for use in carrying on a business. This includes a business carried on by either the taxpayer (i.e., the owner of the land) or by a specified related entity. Further, as a result of last-minute Senate amendments, an additional business exception also applies where ‘vacant land’ is leased at arm’s length for use in any business (i.e., not just a business of the taxpayer or of a related entity). Refer to S.26-102(1) and (9).
Additional amendments were also made to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 and explained in an accompanying Supplementary Explanatory Memorandum (‘SEM’), aimed at affording relief to many unforeseen victims of the original provisions, including primary producers and other ‘holders of vacant land’ who have found themselves impacted by the new measures due to exceptional circumstances (i.e., circumstances beyond their control).