Holding vacant land to become more expensive
The Government is targeting taxpayers that engage in land banking or hold vacant land by denying a deduction for any costs in holding that land.
The Government has announced that anyone carrying on a business will be exempted from this proposed law. However, anyone passively holding vacant land for the development of future rental properties from 1 July 2019 will face the denial of deductions for holding costs.
Timing of deductions
Under the Budget announcement, the Government is proposing that any tax deductions for holding vacant land will be denied until the following conditions are met:
- A property is constructed on the land
- Regulatory approval has been received to occupy the property
- The property is available for rent.
However, costs that are not deductible before the above criteria have been met, are able to be added to the cost base of the property to reduce any future capital gain, where they would normally form part of the cost base.
Primary producers to be exempt
Owners that acquire land for use in a primary production business will be exempted from this measure.
At first glance, the Government’s proposal appears to legislate against the outcome in a seminal High Court decision, and will eliminate negative gearing benefits in the early years of a build to rent development.
The denial of deductions for a future revenue generating asset repeals a core principal of the tax legislation and will force future investors to have greater access to capital before engaging in these types of developments. This appears to be another attempt to improve housing affordability by forcing land owners to either develop additional housing on these vacant blocks, or make it uneconomical to hold the land.