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  • Vacant land prior years

    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.

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    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 ongoing expenses 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 these expenses to the cost base of the land when calculating your capital gain or capital loss when you sell it.

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    Building a rental property on vacant land

    If you bought vacant land prior to 1 July 2019 with the intention of building a dwelling to rent out, and you still held this vacant land on or after 1 July 2019, you may (in some cases only) be able to claim tax deductions for expenses such as:

    • loan interest
    • council rates
    • other ongoing holding costs.

    To be entitled to these deductions, you must demonstrate that you have taken (and are taking) active and genuine steps to build the dwelling and make it available for rent as soon as it's completed. We expect that you make continuing efforts within normal timeframes relevant to the industry. We accept there are times where delays may occur. Where these delays are beyond your control, you may still be entitled to claim tax deductions.

    However, if you then decide to sell your vacant land or your intention to build a residential dwelling to rent changes, you must cease claiming deductions immediately. Ensure you keep records of expenses claimed as the remaining costs may form part of your cost base when calculating your capital gain or capital loss.

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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.

    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.

    Example: Delays beyond your control

    Tony purchases a block of land with the intention to build a residential dwelling to rent. 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 building is let once it is completed.

    As Tony has demonstrated that he made continuing efforts within normal industry timeframes to derive rental income, he can deduct his interest, council rates and water expenses. The delays in the development were beyond his control.

    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 within your cost base.

    Example: Unacceptable delays

    Emily seeks finance from her bank to purchase a block of 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 enquires 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 vacant land purchase until she gets an offer to buy her land by a property developer. Emily is no longer making active and genuine steps to construct the rental property and cannot claim interest deductions.

    As Emily can’t demonstrate that she undertook active steps to develop the property she will not be allowed to claim any deductions relating to the property.

    If Emily undertakes steps to build a dwelling to rent in the future, she may be able to claim associated deductions but only from the time she progresses on her intention. 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, if 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 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: 05 Nov 2020QC 23639