If the land is only partly used in such a business and partly for another purpose, holding costs must be apportioned so that only those relating to the part of the land not used in the business are potentially non-deductible
Based on S.26-102(1) and S.26-102(2), a deduction for holding costs related to vacant land will not be denied, to the extent that the land is used or available for use in carrying on a business to derive assessable income by any one or more of the following entities:
- The taxpayer that ‘holds’ the vacant land.
- If the taxpayer is an individual, their spouse or children under 18.
- An ‘affiliate’ of the taxpayer (or an entity of which the taxpayer is an ‘affiliate’). The term ‘affiliate’ is defined under S.328-130. Broadly, an individual or company is an affiliate of another entity if they act, or could reasonably be expected to act, in accordance with the entity’s direction or wishes, or in concert with the entity, in relation to their business affairs.
- An entity ‘connected with’ the taxpayer. The term ‘connected with’ is defined under S.328-125. Broadly, an entity is ‘connected with’ another entity if one ‘controls’ the other, or if both entities are ‘controlled’ by the same third entity. Control may be direct or indirect, and generally requires a ‘control percentage’ of at least 40% in the relevant entity.
What if the land is only partly used for business purpose?
The ‘carrying on a business’ exclusion only applies to the extent the vacant land is used, or available for use, in a business carried on by the taxpayer or one of the related entities specified in the section above. Therefore, if the land is only partly used in such a business and partly for another purpose (e.g., where part of the land from which the business runs is set aside to build a residential rental property), holding costs must be apportioned so that only those relating to the part of the land not used in the business are potentially non-deductible under S.26-102. The Explanatory Memorandum states that apportionment must be on a “fair and a reasonable basis, in the context of the particular property”.
- example – one third of a land is used for carrying on firewood sales business where the firewood is stored in the open, and no structures on the land. The remainder of the land is fenced off for constructing a rental property. Only the holding costs which relate to the part of the land used for carrying the firewood business are deductible, not the costs relate to the land held ready for construction of a rental property.
What if the land is for future use in a current business?
The ‘carrying on a business’ exception applies to vacant land “in use, or available for use” in an eligible business. However, issues may arise where the relevant land is held for later use in a current business, such as where a property developer acquires land for a future project. To remove any doubt, the Explanatory Memorandum confirms that “the exception is not limited to land that is in active use by a business but also applies to land or parts of land that are available for business purposes”.
- example – in a farming business, vacant land that is currently left fallow to restore its fertility, or where no crops are planted for a period due to climate conditions. In such scenarios, the land is “available for use” in a current business. In other words, if the land is held for future use in a business currently carried on by the taxpayer, then it is considered to be “available for use”, or it is made available to a specified related entity for future use in a business that entity currently carries on.
In addition, for a previous business asset, otherwise deductible holding costs will remain deductible after such entity ceased to carry on business, given that the land was being used in its business at the time the relevant business ceased. Refer to S.26-102(3).