Edited version of private advice

Authorisation Number: 1051797282135

Date of advice: 18 January 2021

Ruling

Subject: Expenses associated with holding vacant land

Question

Can you claim a deduction for the expenses associated with holding vacant land under the exceptional circumstances exemption?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You purchased land.

You entered into a building contract to commence building an investment property. Construction of the walls and roof were completed however the remaining build was not complete.

You received a letter from the State's Building Services Authority (BSA) advising that they were aware the builder had recently written to you advising it is in liquidation and unable to complete its obligations.

Further correspondence was received from the appointed liquidator advising the building company no longer held an active licence with the BSA and the company is without funds to perform its obligations under the building contract.

On XXXX you terminated the building contact.

A legal dispute was instigated in XXXX. The dispute is still ongoing.

Due to the ongoing legal matters the property has still not been completed and is unable to be lawfully occupied.

Relevant legislative provisions

Income Tax Assessment Act section 26-102

Income Tax Assessment Act subsection 26-102(6)

Reasons for decision

Subsection 26-102(1) of the Income Tax Assessment Act 1997 (ITAA 1997) limits the deduction on the amounts relating to holding land if at that time of incurring the loss or outgoing there is no substantial and permanent structure in use or available for use on the land.

This means that from the introduction of the legislation on 1 July 2019 income tax deductions to taxpayers will be denied for losses and outgoings incurred in holding vacant land, regardless of when acquired, to the extent the land is not at the time of incurring the expense or outgoing:

•         used or held available for use by the entity in the course of carrying on a business for the purposes of gaining or producing assessable income; or

•         used or held available for use in carrying on a business by:

o   an affiliate, spouse or child of the taxpayer; or

o   an entity that is connected with the taxpayer or of which the taxpayer is an affiliate

Subsection 26-102(4) of the ITAA 1997 states that residential premises that you construct or substantially renovate will be treated as not being a substantial and permanent structure until they can lawfully be occupied and are leased, hired or licensed (or available for lease, hire or licence).

Subsection 26-102(6) allows an exception where structures have been affected by natural disasters or other exceptional circumstances.

The exemption may apply where an exceptional circumstance outside your control occurs that results in the substantial and permanent structure no longer being on your land or the structure being disregarded. That is, 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 residential premises, then the residence must have been lawfully able to be occupied and have been either leased or available for lease prior to the exceptional circumstance.

In your case, it is considered that there was not a permanent and substantial structure on the land as the premises was not lawfully occupied prior to the time that the exceptional circumstance occurred. Therefore, you are not entitled to claim holding costs in relation to the land until there is a permanent and substantial structure on the land that is capable of being lawfully occupied and is made available for lease or leased.