- Limiting tax deductions for vacant land - amended and passed
Legislation seeking to deny a deduction for the costs of holding Vacant Land (Treasury Laws Amendment Bill 2019) has been amended by the Senate and subsequently approved by the House of Representatives on 22 October 2019. The Bill now awaits Royal Assent before it passes into law.
The amendments to the original Bill were introduced after lobbying and widespread concern that the legislation had wider consequences than had originally been intended.
Current income tax law allows those who hold vacant land to claim a deduction for the costs of holding the land if it is held for income producing purposes, or if they are carrying on a business to produce income. The new law will deny land owners a tax deduction for the costs of holding vacant land in certain circumstances. Holding costs include ongoing borrowing costs, interest incurred for loans to acquire the land, land taxes, council rates and maintenance costs.
As outlined in our previous client alert, the original legislation as proposed had far reaching consequences for some taxpayers who were not the obvious target when the changes were originally announced. For example, certain taxpayers who borrowed to acquire vacant land to lease for farming or livestock to an unconnected entity would not have been able to claim a deduction for the borrowing costs, whereas the same taxpayer leasing to a connected or affiliated entity could have a deduction.
The updated legislation contains three new exceptions.
The first exception relaxes the rules in circumstances where the land became vacant because of a natural disaster, fire, structural defect or similar circumstance which were beyond reasonable control of the land holder. This relaxation allows the land holder to maintain their deductions for the holding costs for a three year period whilst the structure is being rebuilt. The Commissioner has the discretion to extend this period.
The second exception relates to land on which a primary production business is carried on. Where the land holder, or a related, connected or affiliated entity which leases the land carries on a primary production business and there are no residential premises on (or under construction on) the land, the holding costs will be an allowable deduction.
The third and broader exception applies to vacant land which is leased, hired or licensed at a commercial rate to any entity (related or unrelated) which is used or made available for use in carrying on a business. Again there must be no residential premises on (or under construction on) the land.
Once Royal Assent is obtained, the new legislation will be effective from 1 July 2019 and will impact costs being incurred now, regardless of whether the land was held before this date.
Grant Thornton Comment
While the amendments to the legislation are welcomed and have provided valuable exceptions (particularly so where land is rented for the purpose of primary production, or for business purposes by another or circumstances beyond the control of the holder have impacted the structure), other than the three exceptions noted, no further changes were made to the legislation.
As a result, when enacted the new law will continue to have significant impact on certain individuals and trusts who hold land where residential property is to be developed. Holding costs will only be allowable for tax purposes when the property is completed and being marketed for rent. Those who are leasing or rent vacant land at a commercial rate to those who are not conducting a business (eg for recreational purposes such as agistment of horses for personal use) will still be captured and denied deductions on the land.
The apparent anomaly in the initial drafting which gave relief where land was leased to related parties but not to third parties has been corrected. The exceptions may also make it easier for super funds to access the deduction where they hold land that is leased and used for business purposes.
However the rules continue to prevent deductions for holding costs where vacant land is leased to a community club, government organisation, charity or hobby farm for example, where there is no business activity being undertaken.
There is also no relief for those with drought impacted land that cannot be rented due to current drought conditions. The disaster exceptions only apply to structures impacted, not to the conditions of the land itself that may prevent it from being used.
Issues still exist where tenants cease business or where there are periods where the land is not used for business purposes by the tenant. The land holder will need to know when this is the case to get their tax position correct.
Two of the exceptions specify that there must be no residential premises on the land for the exception to apply. The reason for this is unclear and may arbitrarily catch some taxpayers, particularly where the accommodation is a minor part of the overall land. It is very common for agricultural land to income some form or homestead or workers residence which may negate the use of the exception. Residential premises is defined according to the GST rules and includes mixed use structures (part commercial, part residential), transportable/demountable structures and premises without a residential character but which are actually used as a residence.
The new legislation has no grandfathering provisions and will adversely affect some taxpayers who are already locked into investment decisions made before the rules were announced. It will be interesting to see whether the additional tax costs of those affected will eventually be passed on to the user of the land by way of increased rent.
If you wish to discuss any of the information included above, please get in touch with your Grant Thornton Tax or Relationship Partner.