Changes to Vacant Land Tax deductions

18 September 2019

New tax legislation changes could hit owners of vacant land, including famers and primary producers, denying them a tax deduction for expenses relating to their properties.

The government’s Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019, removes deductions for costs incurred by owning vacant land unless it is being used by the owner or a related party to carry on a business.

The law will apply to most non-corporate entities holding vacant land and earning income but not carrying on business.

Lance Cunningham, National Tax Director at BDO Australia said: “Under the proposed amendments, there is a concern that taxpayers who have borrowed funds to acquire vacant land will be denied a deduction for the costs associated with holding the land – e.g. interest on borrowings - where the land is being leased to an unrelated third party.”

“The land owner will continue to be fully assessable on the rental income from leasing the vacant land,” he said.

“There is concern the proposal will see irregular outcomes where vacant land is leased to an unrelated third party – which can be the case with farmers and primary producers.

“The Explanatory Memorandum to the Bill acknowledges that ‘leasing land to related parties is common in the agricultural sector for family enterprises and the special rule for related parties ensures that the amendments do not adversely affect primary producers using such arrangements. However, it looks like the Government may have overlooked the unintended consequences of similar arrangements between unrelated parties which has no tax avoidance motive and will disadvantage those same primary producers.”

For example, a farmer that owns property and leases part of their land on an ‘arm’s length’ basis to another farmer or takes the other farmer’s cattle on agistment, will not be allowed a deduction for expenses relating to the vacant land unless the land:

  • has a substantive permanent building / structure that is in use or is available for use having an independent purpose to another structure. (Farm land which is leased or used purely for agistment purposes is generally unlikely to have any substantial buildings or structures on it. Fences or farm sheds commonly found on agisted vacant land do not satisfy these requirements); and\or
  • is being used or is available for use in carrying on a business of the taxpayer or entities related to the taxpayer (such as an affiliate, spouse or child of the taxpayer or an entity connected with the taxpayer). But unrelated third parties are excluded from this exception.

A deduction will still be available where the land is:

  • used or held available for use, in carrying on a business of the taxpayer, an affiliate or connected entity (A non-corporate land owner is generally not considered to carrying on business in relation to the leasing or the land or agistment activity).
  • held by a company, superannuation fund (other than a self-managed super fund (SMSF), a managed investment trust, a public unit trust and unit trusts or partnerships of which all the members are entities of the above types.

“This means expenses relating to vacant land held by entities in the business of property development for future development of a housing estate for sale will continue to be allowable,” Lance said.

When enacted, these rules will apply to expenses incurred on or after 1 July 2019, regardless of when the land was first held which means the rules will apply to land held prior to the commencement of these amendments but only to expenses incurred after 1 July 2019.