‘Primary producer’ exception may apply where vacant farmland is leased to another entity. ‘Exceptional Circumstances’ applies to structures on the property that are affected by natural disasters or other exceptional circumstances.
‘Primary Producer’ Exception
Under S.26-102(8), the restriction on claiming deduction for the costs of holding vacant land will be lifted if, at the critical time (generally, when the loss or outgoing is incurred) all of the following criteria are met:
- The land is under lease, hire or licence to another entity.
- The taxpayer or a specified related entity (as previously discussed in the first article on the exclusion topic) is carrying on a primary production business.
- The land does not contain residential premises.
- Residential premises are not being constructed on the land.
This exception aims to ensure that, any land lease arrangements undertaken by entities linked to a primary production business do not result in otherwise deductible holding costs being denied, provided that it is rented to produce income. For example, if the ‘carrying on a business’ exception does not apply, the ‘primary producer’ exception may apply where vacant farmland is leased to another entity:
- example – a family trust, which is connected to party A, runs a primary production business on several lots of ‘vacant land’. Two of those lots, comprise fenced paddocks and contain no substantial and permanent structures, have now become surplus to the family trust’s business; party A plans to agists those lots to an unrelated party B, who will use them in his own primary production business.
Under S.26-102(8), party A will be able to continue to claim deductions for the holding costs on the grounds that:
- the land is licenced to party B (i.e., another entity);
- party A and the family trust are connected and it conducts a primary production business;
- the land does not contain residential premises; and
- residential premises are not being constructed on the land.
‘Exceptional Circumstances’ Exception
This exception applies to structures on the property that are affected by natural disasters or other exceptional circumstances. In order for this exception to apply, the relevant structure must be affected and cannot be used or lawfully occupied, for example, the structure is damaged by a bushfire.
However, delays in construction will generally not regarded as exceptional circumstances. In addition, such exceptional circumstances must affect the structure itself, otherwise it may not be applied; for example, the completion of renovation is delayed due to financial hardship. But, if the absence of a structure on land is both due to exceptional circumstance and other circumstance, the exemption will apply if the main reason for the absence of a structure is the exceptional and uncontrollable circumstance; for example, a building was destroyed by fire and there are also delays in subsequently constructing a new building, the main reason for the absence of a structure is the fire here.
Furthermore, the ‘exceptional circumstances’ exception can still apply if the event that rendered the land vacant occurred before 1 July 2019 and the land is still vacant; any expenses benefiting from the application of this exception need to be incurred no more than three years (or such further time as the Commissioner may allow) after the land ceased to contain a usable substantial and permanent structure. Refer to S.26-102(6)(d).
- example – a rental property was affected by a major building fire (considered to be exceptional circumstance), the owner of the property can continue to claim otherwise allowable deductions for holding the land, despite the fact that there is no substantial and permanent structure in use, or available for use, on the land, for a maximum period of three years from the time the fire occurred.
- If the property is still unable to be rented after three years, a request for extension can be applied to the ATO, outlining the relevant reasons and steps that have been taken to rectify the problem.