Claiming Deductions for Vacant Land: What You Need to Know
Owning vacant land can be a valuable investment, but it comes with its own set of tax rules, particularly when it comes to claiming deductions. Recent changes to Australian tax law have placed stricter limitations on the deductions you can claim for vacant land. This blog will guide you through what you need to know about claiming deductions for vacant land, including the key exceptions and how to ensure compliance with the Australian Taxation Office (ATO).
Understanding the Basic Rules
The rules around claiming deductions for vacant land have tightened, particularly for individuals, trusts, and self-managed superannuation funds (SMSFs). As of 1 July 2019, deductions for holding costs such as interest, land tax, and council rates on vacant land are generally no longer allowed unless the land is used to carry on a business or is genuinely available for rent.
Key Points to Consider:
1. Non-Deductibility of Holding Costs:
If the land is vacant and not being used to carry on a business or earn rental income, you cannot claim deductions for holding costs like interest on loans, council rates, and land tax.
2. Definition of Vacant Land:
Land is considered vacant if there is no substantial and permanent building or structure on it that is in use or available for use. This could include residential or commercial buildings, but structures such as sheds or fences alone do not qualify as substantial.
3. Intention to Build or Develop:
If you purchase vacant land with the intention to build a rental property, you generally cannot claim deductions for the costs incurred while the land remains vacant. Deductions will typically only become available once construction is complete and the property is available for rent.
Exceptions to the Rules:
There are certain exceptions to the limitations on deductions for vacant land. These exceptions allow deductions under specific circumstances:
1. Carrying on a Business:
If you are using the vacant land to carry on a business, such as primary production (e.g., farming) or property development, you may still be eligible to claim deductions for holding costs. The business must be conducted on the land itself, not merely associated with it.
2. Land Leased to a Tenant:
If the land is leased to a tenant who is using it for business purposes, deductions may be allowable. For example, if the land is leased to a farmer who uses it for grazing livestock, the holding costs could be deductible.
3. Genuine Rental Use:
If a property on the land is genuinely available for rent and efforts are being made to rent it out, you may be able to claim deductions, even if the land is temporarily vacant.
4. Natural Disasters or Other Events:
If your property has been affected by a natural disaster or other significant event that has rendered it temporarily unusable, you may still be eligible to claim deductions for the period during which the land is being restored.
Example Scenarios
Example Scenario 1 – Vacant Land Purchased for Future Development
Sarah, an investor, purchases a block of vacant land in a suburban area with the intention of building a rental property. Her plan is to start construction within the next 12 months. However, due to delays in obtaining building approvals and securing a construction loan, the land remains undeveloped and vacant for the entire year.
Holding Costs:
Sarah incurs several holding costs during this period, including interest on the loan she took to purchase the land, council rates, and land tax. These costs amount to $8,000 for the year.
Tax Implication:
Under the current tax rules, Sarah is not allowed to claim any deductions for these holding costs while the land remains vacant. Deductions for expenses like interest on her loan, council rates, and land tax can only be claimed once the construction of the rental property is complete and the property is available for rent. Until then, these expenses must be borne without any immediate tax relief, making it crucial for Sarah to plan her cash flow carefully during the development phase.
Example Scenario 2 – Primary Production Business
John, a farmer, owns a piece of vacant land adjacent to his primary farm. He uses this land to expand his crop-growing business. The land is actively used for planting, growing, and harvesting crops, which are then sold at local markets. John incurs holding costs for this land, including interest on the loan used to buy the land, council rates, and land tax, totaling $5,000 for the year.
Business Use:
The land is an integral part of John’s farming business and is fully utilised in the production of income through the sale of crops.
Tax Implication:
Because John is using the land as part of his active primary production business, he is eligible to claim deductions for the holding costs associated with the land. This includes the interest on his loan, council rates, and land tax. The fact that the land is being used directly in his income-generating activities (farming) allows him to reduce his taxable income by the $5,000 in holding costs, which helps improve his overall business cash flow.
Example Scenario 3 – Land Temporarily Vacant Due to Natural Disaster
Emma owns a rental property on a piece of land in a rural area. Unfortunately, a severe bushfire destroys the property, leaving only the land. Emma intends to rebuild the rental property as soon as possible, but the reconstruction process is expected to take at least a year. During this time, the land is vacant, and Emma continues to incur holding costs such as loan interest, council rates, and insurance premiums.
Temporary Vacancy:
The land was previously used as a rental property and was generating rental income until the disaster struck. The vacancy is due to unforeseen circumstances, and Emma’s intention is to restore the property to its rental purpose.
Tax Implication:
Given that the land was previously generating rental income and is temporarily vacant due to a natural disaster, Emma may still be able to claim deductions for the holding costs during the reconstruction period. The ATO recognises that such vacancies are beyond the owner’s control, and as long as Emma’s intention is to return the land to income-producing use (i.e., rebuilding and renting out the property), she can deduct the ongoing holding costs. This includes the interest on her loan, council rates, and any insurance premiums, helping to mitigate the financial impact of the disaster during the reconstruction phase.
Visit ATO for more information and examples.
At MKG Partners, we understand the complexities of tax law and how it applies to property investments. Our team can help you navigate the rules surrounding deductions for vacant land, ensuring that you maximise your tax savings while staying compliant with ATO regulations. Contact us today to see how we can assist you with your property tax needs.
