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  • Vacant land before 1 July 2019

    If you've acquired vacant land (either for private purposes or as an investment), it's usually considered a capital asset subject to capital gains tax (CGT) when you sell the land.

    If you purchase land for use in a business or profit-making activity that deals in land, we treat any sale proceeds as ordinary income. You may need to register for goods and services tax (GST).

    If you buy vacant land with the intent to build a rental property on it, you may be able to claim tax deductions for expenses incurred in holding the land before 1 July 2019.

    Law changes limit deductions for vacant land's holding costs incurred from 1 July 2019, irrespective of when the land was acquired – that is, it doesn't matter whether the vacant land was held before, on or after 1 July 2019.

    On this page:

    Land as a capital asset

    Vacant land held as a capital asset is subject to the same CGT rules as other properties.

    You should keep the following records:

    • date and cost of obtaining the land
    • your holding costs such as  
      • council rates
      • loan interest.

    You can't claim these expenses as an income tax deduction because the land does not generate income. You can add the cost of obtaining the land to the cost base of the land when calculating your capital gain or capital loss when you sell it. The holding costs may be added to the cost base of the land when calculating your capital gain when you sell it.

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    Intention to build rental property before 1 July 2019

    If you bought vacant land before 1 July 2019 with the intention of building a rental property on it, you may be able to claim tax deductions for holding costs (of the vacant land) that incurred before 1 July 2019. Some of these holding costs are:

    • loan interest
    • council rates
    • land tax.

    To be entitled to these deductions before 1 July 2019, you must demonstrate that you took active and genuine steps to build the dwelling and make it available for rent as soon as it was going to be completed. We expect that you made continuing efforts within normal timeframes relevant to the industry.

    We accept there are times where delays may have occurred. Where these delays were beyond your control, you may still be entitled to claim tax deductions for holding costs that incurred before 1 July 2019. However, if your intention to build a rental property changed, you should have immediately stopped claiming deductions for holding costs of your vacant land.

    Ensure you keep records of your expenses, as you may add the holding costs which are not deductible to the cost base of your land for CGT purposes. This means you can potentially reduce any capital gain made when you dispose of the land in the future. The holding costs for land acquired before 21 August 1991 should not be added to the cost base.

    The holding costs cannot create, or increase, a capital loss on sale of your land.

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    Taking active and genuine steps

    Examples of taking active and genuine steps may include:

    • seeking finance for the development from a financial institution or disposing of other investments to fund the development
    • engaging with builders to understand the construction process and obtain building cost estimates
    • engaging with architects to design a suitable house plan
    • researching council development plans or possible covenants over the property
    • meeting with local real estate agents to determine expected rental returns.

    This is relevant only for the period before 1 July 2019.

    Delays beyond your control

    Examples of delays beyond your control may include:

    • disputes in the approval process with local council or neighbours
    • your builder going into liquidation
    • the property has been affected by a natural disaster.

    This is relevant only for the period before 1 July 2019.

    Example: Delays beyond your control

    In July 2017, Tony purchases a block of land with the intention to build a residential rental property. He immediately begins engaging with various builders and visiting display homes to obtain a suitable house plan and estimates of building costs. During this time, Tony also meets with his mortgage broker to acquire a loan to finance construction of the dwelling.

    Upon finalising the house plans, Tony submits them to the local council for approval. However, after a few months, the council rejects Tony’s plans as they don’t meet certain regulations. This dispute takes a number of months to resolve before Tony is able to re-submit plans. Construction of the dwelling commences following council approval and the house is rented out once it is completed before 1 July 2019.

    As Tony has demonstrated that he made continuing efforts within normal industry timeframes to derive rental income, he can deduct his holding costs of the vacant land such as interest on loan for purchasing land and council rates. The delays in the development were beyond his control.

    However, if the land had remained vacant on 1 July 2019, Tony cannot claim deductions for the holding costs incurred from 1 July 2019.

    End of example

    Unacceptable delays

    Examples of unacceptable delays may include:

    • inability to build your desired house due to lack of affordability
    • holding onto the land, due to a downturn in the real estate market, or to generate capital growth – even if you may consider developing the land in the future.

    If a venture becomes dormant and the holding of the land is passive, you will not be able to claim deductions even if there is an intention to revive that venture at some point in the future. These expenses may be included in your cost base.

    This is relevant only for the period before 1 July 2019.

    Example: Unacceptable delays

    In January 2016, Emily seeks finance from her bank to purchase a block of vacant land. She doesn’t discuss any proposed plans to build a dwelling with her broker and it is not factored into the loan application. Emily undertakes some initial enquiries with various builders and visits some display homes during this time. However, she doesn’t sign any contracts to construct a dwelling. Over the subsequent years, Emily’s employment changes which means that she is unable to commit further to the development.

    Emily is seeing that land values are rising in the area and developers are buying blocks close by for development. Although it is now no longer financially viable for Emily to build the rental property, she decides that she can still afford to keep making the interest payments on the loan for her vacant land until she gets an offer to sell her land to a property developer. Emily never took active and genuine steps to construct the rental property, thus, she cannot claim interest deductions for her vacant land's loan repayments.

    As Emily can’t demonstrate that she undertook active steps to develop the property, she will not be allowed to claim any deductions for the holding costs of the vacant land at any time.

    If Emily then undertakes active and genuine steps to build a rental property, she may be able to claim deductions for the holding costs of the land but only from the time she progresses on her intention and only if this happened before 1 July 2019. Emily can't claim deductions for holding costs of the vacant land from 1 July 2019.

    Where Emily claimed a deduction for holding costs, she will not be able to include those expenses in her cost base.

    End of example

    See also:

    Land as trading stock

    If you sell land that was trading stock, the sales proceeds are assessable income. Land may be treated as trading stock for income tax purposes if you:

    • carry on a business activity that involves dealing in land
    • hold the land for the purpose of resale.

    Business activities that involve dealing in land include acquiring land:

    • to develop, or subdivide, and sell
    • for the purpose of building a dwelling or commercial property and selling the developed property.

    Even a one-off transaction undertaken in a business-like or commercial manner can result in land being treated as trading stock. For example, you purchase a block of land to develop, or subdivide, and then sell. In this case, the land would be treated as a revenue asset rather than a capital asset.

    We consider that the business activity begins when you start a definite and continuous cycle of operations designed to lead to the sale of the land.

    For vacant land that is trading stock, the proceeds from the land are treated as ordinary income (not a capital gain) and associated costs are deductible.

    Land converting from capital asset to trading stock

    If you own land as a capital asset, but start to hold it as trading stock, there may be CGT implications. Under the trading stock rules, you can choose to start holding the trading stock at either its original cost or its market value. If you choose market value, CGT event K4 will happen. This means that you may make a capital gain or loss.

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    GST treatment of land in property transactions

    If you're dealing with property, including one-off transactions, we may consider you to be carrying on a business or a commercial venture and you need to register for GST.

    Once registered, you need to include the GST in the price of the goods you sell, including:

    • vacant land
    • commercial and commercial residential premises
    • new residential premises.

    You'll be able to claim credits for the GST included in the price of most of your business purchases, subject to normal GST rules. You'll also need to report these transactions by completing a business activity statement.

    If you buy vacant land with the intent to build a residential rental property on it, you are not liable for GST on the rent you charge. You'll also not be able to claim credits for the GST included in anything you purchase.

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    Last modified: 14 Jan 2021QC 23639