Holding costs on vacant land

|by Jun Yang|Property, Construction and Building Services

The amendment which takes effective from 1 July 2019 has been passed by the house of representatives and now moved to the Senate.

Prior to 1 July 2019, if you hold a block of vacant land and you want to build an investment property, the holding costs including interest, rates and land tax incurred before you start to earn rental income, you can rely on Steele case to claim those holding costs under general deduction rule Section 8-1 ITAA97 provided you satisfy:

  • Interest and other holding costs are not private nor domestic
  • Continuing efforts are undertaken in pursuit of deriving assessable income

Contrast to the above, from 1 July 2019, unless you hold the block of vacant land in the excluded structure, the holding costs will not be deductible till the property is available for rent. And it is regardless when you acquire the vacant land which means there is NO grandfather provision for the vacant land purchased before 1 July 2019. The outgoings un-deductible in the year are to be added on the cost base of the asset for the capital gain tax purpose.

The excluded structures are:

  • company
  • managed investment trusts
  • public unit trusts or
  • unit trusts or partnership which each member falls into the entity mentioned above

In other words, the amendment applies to individuals, discretionary trusts and self-managed super fund which are most commonly used.

The amendment does not apply in the following situations:

  • if the vacant land is used in the course of carrying on a business or
  • an affiliate, spouse or child of the tax payer uses the land in carrying on a business

An example is given in the memorandum to demonstrate carrying on a business and mixed use of the land:

Howard owns a country house with a pool on a hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. His house and firewood business are separated by a fence and the remainder of the land is unoccupied and unused. Howard intends to build a rental property on the unoccupied land. Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying out his firewood business, to the extent that the loss or outgoing is necessarily incurred for the purpose of gaining or producing the assessable income from the business. He cannot deduct any expenses associated with the cost of holding the land on which his country house is built because that part of the land is used for private use. The remainder of his land is unoccupied and is not used in carrying on his business and therefore Howard is not entitled to claim any deductions relating to the costs of holding this part of the land even though he intended to derive income from it in the future.

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