Show download pdf controls
  • Deductions for vacant land

    Changes to legislation to limit deductions that can be claimed for holding vacant land received royal assent on 28 October 2019. These changes apply to costs incurred on or after 1 July 2019, even if the land was held before that date.

    In the 2018–19 Federal Budget the government announced that it would limit deductions for vacant land. For more information on these changes, go to Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Act 2019External Link.

    There are some entities and circumstances where deductions for vacant land can still be claimed – for example, where the entity holding the land is a company, where you use the land in carrying on a business, or exceptional circumstances apply.

    See also:

    On this page:

    Entities not affected by this change

    You can continue to claim deductions for expenses incurred for holding costs of vacant land if you're a:

    • corporate tax entity
    • superannuation plan (other than self-managed superannuation funds)
    • managed investment trust
    • public unit trust
    • unit trust or partnership where all the members are entity types listed above.

    What is vacant land

    Land will be considered vacant during the period the entity held the land if:

    • it didn't contain a substantial and permanent structure
    • it did contain a substantial and permanent structure and the structure is a residential premises which was constructed or substantially renovated while the entity held the land and the premises are either
      • not yet lawfully able to be occupied
      • lawfully able to be occupied but not yet rented or made available for rent.
       

    If the land is vacant and the Exceptional circumstances exemption applies, deductions for holding costs of vacant land can still be claimed.

    Example: Vacant land

    Jess purchased a block of land in Brisbane in July 2018 and intends to build a rental property on it. Jess engaged an architect to develop plans and erected some temporary fencing to stop illegal dumping. As the land doesn't yet contain a substantial and permanent structure Jess can't claim deductions for the costs of holding the land.

    End of example

    Farmland not vacant land

    In most circumstances farmland won't be considered vacant as it contains a variety of substantial and permanent structures.

    Example: Farmland not vacant – substantial structure

    The AB family trust holds a single title parcel of farmland on which two family members grow grain. The land contains a number of silos used to store the grain. Expenses related to holding the land such as interest costs and council rates are not impacted by this measure because the land is not vacant as there is a substantial permanent structure on that land (the silos).

    End of example

     

    Example: Farmland not vacant – family homestead

    John and Mary have a large parcel of farmland. The land contains a homestead that has been on the land for more than a century and is the family home. John and Mary are not affected by this change as the land is not vacant; the land contains a substantial structure (the homestead).

    John and Mary's ability to claim deductions for their holding cost expenses will depend on whether any of the land is also being used to generate assessable business income.

    End of example

    Costs of holding vacant land

    The costs involved in holding vacant land include:

    • ongoing borrowing costs, including interest payments on money borrowed for the acquisition of land
    • land taxes
    • council rates
    • maintenance costs.

    Claiming deductions for vacant land

    For expenses of holding land to be deductible, they must have been incurred in carrying on a business such as farming or gaining or producing assessable income. These changes operate to limit the deductions where the land is vacant.

    Use the determination questions to help you determine if your deductions for expenses related to your vacant land are limited.

    To claim deductions for vacant land the land must also meet one of the following:

    If the substantial and permanent structure is a residential premises constructed or substantially renovated while you held the land the premises must also be either:

    Determine if deductions for vacant land are limited

    You can use the questions below to determine if your deductions for expenses related to your vacant land are limited.

    1. Is the land held by an entity not affected by the change?
      Yes – your deductions are not limited
      No – continue to question 2
    2. Is the land used (or available for use) in a business carried on by the owner of the land for the purpose of gaining or producing the assessable income?
      Yes – your deductions are not limited
      No – continue to question 3
    3. Is the land leased at arms-length to a third party and used or available for use in a business and it does not contain residential premises or such premises are not being constructed on it?
      Yes – your deductions are not limited
      No – continue to question 4
    4. Is the land leased to a third party and you or an entity connected with you is carrying on a primary production business and the land does not contain residential premises or such premises are not being constructed on it?
      Yes – your deductions are not limited
      No – continue to question 5
    5. Is there a substantial and permanent structure on the land which is used or available for use and has a purpose independent of, and not incidental to another structure?
      Yes – continue to question 6
      No – continue to question 8
    6. Is the substantial and permanent structure is a residential premises constructed, or substantially renovated, while the current owner held the land?
      Yes – continue to question 7
      No – your deductions are not limited
    7. Is the residential premises lawfully able to be occupied; and
      1. leased, hired or licensed; or
      2. available for lease, hire or licence?
        Yes – your deductions are not limited
        No – continue to question 8
       
    8. Did exceptional circumstances occur that led to a substantial and permanent structure no longer being on the land or used or available for use?
      Yes – continue to question 9
      No – your deductions will be limited
    9. Did the exceptional circumstance occur 3 or more years ago?
      Yes – continue to question 10
      No – your deductions are not limited
    10. Have you received an extension of time from the Commissioner?
      Yes – your deductions are not limited
      No – your deductions will be limited.

    Land used in business

    If the vacant land is used in business, deductions for holding costs for the land are not impacted by these changes if:

    • the land is used or available for use in carrying on a business by
      • you
      • your affiliates or an entity of which you are an affiliate either by
      • your spouse or child (under 18)
      • an entity connected with you
       
    • the land is leased at arm's length to a business for use in their business
    • a residential premises is not being constructed on the land and the land does not contain a permanent structure.

    If residential premises are being constructed on vacant land being used by your business, you can only claim a deduction for the costs of holding the land that is being used in the business and not for that part of the land relating to the construction of residential premises. The deductions should be apportioned on a fair and reasonable basis.

    Example: land used in business – residential rental property being constructed

    Howard owns one hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. He stores all his firewood in the open and there are no structures on the land. Howard has separately fenced off the remainder of the land and has started earthworks to clear the land ready for construction of a rental property.

    Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying on his firewood business.

    Howard is not entitled to claim any deductions relating to the costs of holding the land ready for construction of a rental property.

    End of example

    Land held by primary producers

    Deductions for land used by you in a business of primary production are not impacted by these changes.

    In addition if you hold vacant land that is leased, hired or licensed to another entity, deductions can continue to be claimed where:

    • a primary production business is carried on by
      • you
      • your affiliates or an entity of which you are an affiliate either by
      • your spouse or child (under 18)
      • an entity connected with you
       
    • a residential premises is not on the land, or being constructed on the land.

    If residential premises are being constructed on vacant land being used to carry on a primary production business, you can only claim a deduction for the costs of holding the land that is being used for primary production and not for that part of the land relating to the construction of residential premises. The deductions should be apportioned on a fair and reasonable basis.

    You need to consider various indicators before you decide if you are in a business of primary production. For a comprehensive explanation of the relevant indicators together with examples of the application of the indicators, see – Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

    Example: primary production exception

    Gina owns vacant land in New South Wales which she rents to her spouse Robin for use in his primary production business. Robin, as Gina’s spouse, satisfies the related parties condition (spouses, children under 18 years old, affiliates and connected entities) that allow Gina to deduct her costs of holding the land. This is because Robin is carrying on a primary production business on the land to gain or produce assessable income.

    End of example

    Exceptional circumstances exemption

    Deductions for holding costs of vacant land can still be claimed if the exceptional circumstances exemption applies.

    An exemption can apply where an exceptional circumstance outside your control occurs that results in the substantial and permanent structure no longer being on your land or being disregarded.

    Exceptional circumstances include:

    • a natural disaster
    • a major building fire
    • substantial building defects (where the structure can no longer be lawfully occupied).

    For the exemption to apply there must have been a substantial and permanent structure on the land prior to the time that the exceptional circumstance occurred.

    If the substantial and permanent structure was a residential premises, then the residence must have been able to be occupied under the law and have been either rented or available for rent prior to the exceptional circumstance.

    If before 1 July 2019 you were claiming deductions for vacant land due to hardship or delays in construction you cannot rely on this exemption to continue claiming deductions after 1 July 2019.

    The exceptional circumstances exemption can apply if the event that rendered the land vacant occurred before 1 July 2019 and the land is still vacant.

    Three year limit

    There is a limit of three years from the date of the exceptional circumstance to continue to claim deductions using this exception. This can be extended by applying to the Commissioner clearly stating why the exceptional circumstances exemption should be extended for a period beyond three years.

    Record keeping

    If you are applying the exceptional circumstances exemption you must keep written records of the exceptional circumstance and its effect on the structure for five years after the end of the income year in which the cost was incurred.

    Example: exceptional circumstances major building fire

    Isaac had a rental property in Sydney that he had been renting out since 2010. In March 2019 a fire gutted the house and the entire structure was destroyed. As a major building fire is considered exceptional circumstances Isaac can continue claiming deductions for holding the land, including his interest costs even though there is no substantial structure on the land.

    Isaac will be able continue to claim deductions using the exemption until the property becomes available for rent, or for three years from the time the building was destroyed.

    If the property is still unavailable for rent after three years he can apply to the Commissioner of Taxation for an extension. Isaac must provide the Commissioner reasons why his premises are not rented or available for rent, and the steps taken to rectify the problem.

    If the Commissioner grants the extension, Isaac will be able to continue to claim deductions for his holding costs.

    Isaac should keep records about why his property is unavailable for rent to substantiate his claim.

    End of example

    Substantial building defects

    If you rented out or had an apartment available for rent in a multi-unit development that was found to have significant building faults and deemed uninhabitable you are not likely to be impacted by the changes and deductions could be continued to be claimed as there is still a substantial structure on the land or the exceptional circumstances exemption could apply.

    Substantial and permanent structures

    A substantial and permanent structure is a building or other structure constructed on the land that is:

    • significant in size and value
    • not incidental to the purpose of another structure or proposed structure on the land
    • not related to or reliant on, or exists to support, the use or function of another structure
    • fixed and enduring (not built for a temporary purpose).

    Structures that are substantial and permanent include:

    • a commercial parking garage complex
    • a woolshed for shearing and baling wool
    • a grain silo
    • a homestead on a farming property.

    A structure is not substantial and permanent if it only has value as an addition to another structure.

    Structures that are not substantial and permanent include:

    • a residential garage or shed
    • a letterbox
    • pipes and powerlines
    • residential landscaping.

    Example: residential premises with no permanent structure

    Chelsy owns a block of land where she intends to build a rental property on the land. Although the block of land is fenced and has a retaining wall, it doesn't yet contain any substantial and permanent building. This means the block is vacant land and Chelsy can't deduct any holding costs she may incur in relation to the land.

    As the property is residential, property deductions will be limited until such time as the property contains residential premises that are:

    • lawfully able to be occupied
    • rented or available for rent.
    End of example

    Denied deductions

    Under the existing law the denied deductions may be included in the cost base of the asset for CGT purposes, resulting in a reduction of any capital gain.

    See also:

    Last modified: 26 Nov 2019QC 60628