Vacant land before 1 July 2019

Land as a capital asset

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.

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.

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 or you have unacceptable delays, 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.

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.

Unacceptable delays

Examples of unacceptable delays may include:

• inability to build your desired house due to lack of funds.
• 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.

For more information, see Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.

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.

For more information on trading stock for your business, see Accounting for business trading stock.

For more information on carrying on a business of primary production, see Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

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.

For more information on property and GST, see:

• GST and property
• GST at settlement
• Property development, building and renovating.

Work out if you can claim deductions for vacant land before 1 July 2019, also if CGT and GST apply.