Edited version of private advice

Authorisation Number: 1051719120852

Date of advice: 6 August 2020

Ruling

Subject: Deductions associated with holding vacant land

Question 1

Whether a business is carried on for the purpose of gaining or producing the assessable income by the taxpayer for the purposes of subsection 26-102(2) if the Income Tax Assessment Act 1997 (ITAA 1997) in respect of vacant land owned by the taxpayer, from the period 1 July 2018 onwards?

Answer

No

Question 2

If the answer to question 1 is yes, will the Commissioner confirm that section 26-102 of the ITAA 1997 does not apply to limit the deductions for the loss or outgoings incurred in holding vacant land from 1 July 2019?

Answer

Answer not required, as the answer to question 1 was 'no'.

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

1.            The Trust was established on XX/XX/XX as a discretionary trust.

2.            The Trust was established to purchase land and to build a commercial shopping centre precinct (Centre). The Centre is planned to encompass retain, food and beverage, medical and entertainment tenancies.

3.            A major international leasing agent is on a monthly retainer to source tenants for the Centre.

4.            The business activity of the Trust is operating the Centre. The Centre is the only activity of the Trust.

5.            The Trust purchased vacant land to build the Centre.

6.            Company A as trustee for the Trust is building the Centre on the land purchased. The development cost is estimated to be in excess of $XXm.

7.            At the time of acquisition, the land was vacant, but the previous owner had started the development process (e.g. seeking and receiving approvals and lodging applications).

8.            Since acquisition, the Trust has been finalising designs and approvals to meet the received from main roads and the council. To date approximately $XXm has been incurred (excluding purchase of the land, rates and taxes) on a variety of activities including town planning, concept designs, solicitors fee, council development approval fees, traffic reports, engineer reports.

9.            The Trust is the developer of the Centre and it will manage, lease and maintain the property after the precinct is built.

10.          The Centre is intended to be a long-term investment of the Trust, it is not the intention of the Trust to develop the Centre for sale.

11.          The Trust has no current income deriving activities. It may receive income in the form of distribution from other trusts.

12.          In relation to the requirement in subsection 26-102(2) of the ITAA 1997, the entity that is said to be carrying on the business is the Trust and not any affiliate or connected entity of the Trust. The business referred to is the business of the Centre that is operated by the Trust alone. Other entities don't operate a business on the vacant land.

13.          A request for information sent to you on XX/XX/XX and you provided the following email responses:

1.            What is the business being carried on by the Trust to derive assessable income for the purposes of subsection 26-102(1) of the ITAA 1997?

The entity is carrying on the business of operating a commercial retail precinct.

2.            What is the source of the income being derived by the Trust?

The trust currently has no business income. The income that will be derived once the Centre is constructed will be from the letting, operation and management of the commercial retail precinct. The only income to be received by the entity are distributions from other entities as noted in the facts.

3.            Has the Trust returned any of this income from carrying on this business in any of its income tax returns?

Not currently, however the trust is carrying on the business for the purpose of gaining or producing assessable income. The entity hasn't got into the position to derive income for the reasons detailed in the private ruling.

4. If yes to Question 3, in which income tax returns and how much income was returned in each income tax return?

Nil

5. In relation to the vacant land, explain how the land is used or is available for use by the Trust in carrying on its business?

The business activity of the entity is the business of operating a commercial retail precinct. The Centre is in the construction phase as such the 'vacant land' is still vacant, apart from some civil works. While the Centre is not yet ready for operations, the steps taken as detailed in the facts and background of the private ruling show that there is significant commercial character and more than a mere intention to operate a business and make a profit.

6. Who are the key employees of the business and what activities do they perform in the business?

There are no current employees of the business. The business utilises the expertise of external consultants. Further the entity utilises the systems and bookkeeping functions of related entities of the director. It is the intention that employees will be engaged once the Centre is constructed in the areas of operations, management, leasing, cleaning and maintenance.

Information provided

14.          You have provided the following documents in relation to the ruling request:

(a)         your private ruling application received on XX/XX/XX, and

(b)         supplementary information provided via email on XX/XX/XX.

Relevant legislative provisions

Income Tax Assessment Act 1997, Division 26

Income Tax Assessment Act 1997, Section 26-102

Income Tax Assessment Act 1997, Subsection 26-102(2)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Whether a business is carried on for the purpose of gaining or producing the assessable income by the taxpayer for the purposes of subsection 26-102(2) in respect of vacant land owned by the taxpayer, from the period 1 July 2018 onwards?

Summary

No, the Trust is not operating a business on the vacant land and is therefore unable to claim any expenses associated with holding vacant land.

Detailed reasoning

1.            Division 26 was amended, such that as from 1 July 2019, income tax deductions of expenses associated with holding vacant land will be limited to the extent the land is in use in carrying on a business at a particular time.

2.            Section 26-102 seeks to limit the situations in which tax deductions can be claimed for holding vacant land. The provision does not apply to:

(a)          land which is not considered to be vacant (i.e. contains a substantial or permanent structure in use or available for use)

(b)          corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investments trusts, public unit trusts (covered entities) or unit trusts or partnerships where all the members are covered entities.

3.            A deduction for holding costs is available to the extent that the land is in use, or is available for use, in carrying on a business for the purpose of gaining or producing assessable income of:

(a) you

(b) your affiliate, or an entity of which you are an affiliate

(c) if you are an individual - your spouse, or any of your children who is under 18 years of age, or

(d) an entity connected with you.

4.            You have stated:

·                     the Trust was established to purchase land to be build the Centre

·                     the entity that is said to be carrying on the business is the Trust and not any affiliate or connected entity of the Trust. The business referred to is the business of the Centre that will be operated by the Trust alone. Other entities don't operate a business on the vacant land

·                     the business activity of the Trust is to operate the Centre and the Centre is the only activity of the Trust

·                     since acquiring the vacant land, the Trustee has been seeking approvals from main roads and the council, such that construction of the Centre has not started

·                     income of the Trust will be derived once the Centre is constructed and the income will be derived from the letting, operation and management of the Centre

·                     Trust does not currently have any business income or employees

·                     Trust has not got into the position to derive income.

5.            To determine whether an asset is held in the course of carrying on a business for the purpose of section 26-102, it is necessary to determine if the land is in use, or available for use, in carrying on a business at a particular time.

6.            You have also stated the precinct is intended to be a long-term investment of the Trust, it is not the intention of the Trust to develop the Centre for sale and that the business activity of the Trust is to operate the Centre by managing, leasing and maintaining the Centre.

7.            From the information provided, you do not satisfy the requirements in section 26-102, as construction of the Centre has not started and therefore not able to be used, or be available to be used, in the business activity of the Trust in the 2019-20 income year. Moreover, the Trust does not currently have any business income or employees, nor is the Trust in a position to derive business income. Therefore, the Trust could not be said to be gaining or producing assessable income if the business has not started for the purposes of subsection 26-102(2).

8.            In conclusion, the Trust cannot claim an income tax deduction for any costs it has incurred in developing the vacant land.

Question 2

2.            If the answer to Question 1 is yes, will the Commissioner confirm that section 26-102 does not apply to limit the deductions for the loss or outgoings incurred in holding vacant land from 1 July 2019?

Summary

As the answer to Question 1 is no, it is not required to answer this question.