Since 1 July 2019, deductions for losses and outgoings that relate to holding vacant land have generally been denied where there is no substantial and permanent structure in use or available for use on the land. Ongoing uncertainty around how these rules apply, and the scope of the exclusions, has led the ATO to release a Ruling clarifying when deductions may still be available, outside of the business, entity and primary production exclusions.
When deductions are not denied
Deductions relating to the cost of holding land are not denied if there is a substantial and permanent structure on the land that is in use or available for use. Importantly, the structure must be independent of, and not incidental to, any other structure or proposed structure on the land.
What is a substantial and permanent structure
A structure is considered substantial if it is significant in size, value, or importance in the context of the property. To be permanent, it must be fixed and enduring, such as a house or other completed building.
Structures that exist only to increase the utility of another structure are not considered independent. For example, fencing, garages and sheds may be substantial and permanent in nature, but they are generally incidental to a residence and do not qualify on their own.
In addition, even where a structure meets the “substantial and permanent” test, it must also be in use or available for use for deductions to be allowed.
What does “in use or available for use” mean
From both a residential and commercial perspective, the ATO considers a structure to be available for use only if it is capable of being lawfully occupied.
If a property is deemed unsafe or unfit for occupation by a local council or other relevant authority, deductions are denied from that point onward, as the structure is no longer considered available for use.
Newly constructed or substantially renovated premises
Special rules apply where land was originally vacant and a new structure is constructed, or an existing structure is substantially renovated.
In these cases, the structure is disregarded as a substantial and permanent structure unless both of the following conditions are met:
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the premises are lawfully able to be occupied, such as where an occupancy certificate has been issued
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the premises are leased, hired, licensed, or genuinely available for lease, hire or licence
This means that for vacant land on which a residence is constructed, holding costs are only deductible from the date the property is both legally occupiable and available for lease, for example when it is listed with an agent.
These conditions must continue to be met throughout the ownership period. If the owner decides to stop leasing the property for any reason, the structure may be disregarded, the land treated as vacant again, and deductions denied for that period.
Additional complexities to be aware of
Further complications can arise where:
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land is held across multiple titles and a residence is constructed on only one title
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a vacant block is subdivided and a residence is built on only one of the subdivided lots
Taxpayers should also exercise care when selling land that was originally vacant but later had premises constructed or substantially renovated, as unintended tax consequences may arise depending on how the rules have applied during ownership.
Key takeaway
The vacant land deduction rules are highly technical and depend heavily on whether a qualifying structure exists and is lawfully available for use at all relevant times. Given the potential for denied deductions and unexpected tax outcomes, it is prudent to seek professional advice when acquiring, developing, leasing or selling land that may fall within these provisions.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
