Vacant land
The tax treatment of vacant land depends on whether it is a capital asset or trading stock.
If you've acquired vacant land (as an individual for private purposes or as an investment), it's usually considered a capital asset that is subject to the same capital gains tax rules as other properties. When you sell it, you'll need to work out your capital gain or capital loss and pay tax on any capital gain.
However, if you use your land in a business activity that deals in land, it is considered trading stock. Any proceeds from sale are then treated as ordinary income, and the business enterprise may be required to register for GST. This could happen even for a one-off transaction.
Determining the tax treatment of land
Land is treated as a capital asset unless it is treated as trading stock.
Land is treated as trading stock for income tax purposes if:
- it is held for the purpose of resale, and
- a business activity that involves dealing in land has begun.
Business activities that involve dealing in land would include, for example:
- acquiring land to develop or subdivide and sell
- acquiring land for the purpose of building a dwelling or commercial property and selling the developed property.
It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business begun for that purpose would lead to the land being treated as trading stock.
The business activity is taken to have begun when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.
Land as a capital asset
Vacant land that is a capital asset is subject to the same capital gains tax rules as other properties. When you sell it, you'll need to work out your capital gain or capital loss and pay tax on any capital gain.
Keep records of the date and cost of obtaining the land, and your ongoing expenses, such as council rates and loan interest. These expenses can be added to the capital cost of the land for the purposes of working out your capital gain or capital loss when you sell it.
Income tax deductions
For land treated as a capital asset, you generally can't claim income tax deductions for expenses associated with owning it - such as interest on an investment loan - because the land doesn't generate income. You can add these expenses to the capital cost of the land for the purposes of working out any capital gain or capital loss when you sell it.
However, if you buy vacant land with the intention of building a rental dwelling on it, you can claim tax deductions for expenses such as loan interest and council rates. To be entitled to these deductions you must build the dwelling in a reasonable period of time and make it available for rent as soon as the dwelling is completed.
Land as trading stock
For vacant land that is trading stock, capital gains tax does not apply. Proceeds from the land are treated as ordinary income (not a capital gain) and associated costs are deductible.
Goods and services tax
If you are dealing with property, including one-off transactions, you may be considered to be conducting an enterprise and need to register for GST.
Once you are registered for GST, you will need to include GST in the price of goods you sell and you will be able to claim credits for the GST included in the price of most of your business purchases - subject to normal GST rules. You will also need to report these transactions by completing an activity statement.
Last Modified: Wednesday, 1 August 2012