Tax treatment of vacant land

Prior to 1 July 2019, you could claim tax deductions for holding costs on vacant land purchased with the intention of building a property to rent.

The sort of deductions that used to be claimable, but no longer are, include so-called “holding” expenses such as loan interest on money borrowed to finance the acquisition of the land, council rates, land tax and insurance. To claim the deduction, it was simply necessary to demonstrate that active and genuine steps had been undertaken to build the dwelling and make it available for rent as soon as it was completed.

Such deductions can no longer be claimed where the expense is incurred from 1 July 2019 onwards.

But the pain doesn’t end there. Even while the rental property is under construction, deductions for holding costs still can’t be claimed. In short, the property is still regarded as vacant land until the property is legally able to be occupied by law (for instance, when an occupancy certificate is issued) AND the property is actively marketed for rent.

Is there a way around the rules by claiming that the land is not really vacant?

Sadly not. Although some people would claim that a block of land is not vacant because there is some form of structure on it – such as a garage, a caravan, a shed or even a letter box – the Australian Taxation Office (ATO) disqualifies such structures. In order not be regarded as vacant for tax purposes, any structure on the land must be substantial, permanent and must have an independent purpose – so a house qualifies (provided it is legally able to be marketed and is being actively advertised for rent!) but a garage, say, does not qualify.

So, there’s no tax relief at all?

There are no immediate deductions. However, holding costs in relation to vacant land can be added to the tax cost base for capital gains tax (CGT) purposes. That will reduce the amount of CGT payable when the property is ultimately disposed of. But that could mean a long delay before property owners get any tax benefit!

Are there any exceptions to the new rules?

Yes. Vacant land held for use in a business is excluded from the restrictions, which will be helpful in particular to farmers and those in the business of property developing. Sadly, most mum-and-dad property investors won’t count. The new rules also don’t apply where the vacant land is owned by a company – the restriction is particularly aimed at individuals and those who own land through a family trust or a self-managed super fund.

What about interest on borrowing to finance the construction of the property? Is that disallowed?

No. The ATO specifically highlighted borrowing costs associated with the purchase of vacant land and stated that additional interest on borrowing costs to construct the property are not caught by these rules. If you have only one loan, make sure you have proper documentation to confirm the split of interest between the purchase of the land (not deductible) and the cost of construction of the building (deductible).

I’ve bought a new-build apartment that is uninhabitable because of faulty cladding. It’s now sitting vacant. Am I caught by the new rules?

No. According to the ATO, if you rented out or had an apartment available for rent in a multiunit development that was found to have significant building faults and deemed uninhabitable, you should not be impacted by the changes and deductions can continue to be claimed as there is still a substantial structure on the land.

Why change the rules?

Well, quite simply the government is concerned that too many people are buying vacant land and then sitting on it for years until it grows in value and can be sold at a sizeable profit. Along the way, they claim to have an intention to build on the land, claim the tax deductions, but then never actually get round to building anything.

Few people would object to stopping people like that claiming deductions, but for mum-and-dad property investors who really do intend to build and who often factor in the tax deductions to help finance the project, this is a retrograde step that will need to be built into budgets to determine the financial viability of small-scale subdivisions and developments.

What do I need to do?

If you own vacant land or are looking to invest in land with a view to constructing a rental property, seek advice from a tax professional. In particular, if you are relying on the tax deductions to make a project financially viable, you may need to look again at your budgets and cash flows to assess whether the project is still viable.

Mark Chapman is the director of tax communications at H&R Block.