Edited version of private advice

Authorisation Number: 1051856951922

Date of advice: 25 June 2021

Ruling

Subject: Deductions for vacant land

Question 1

Is the structure on the land substantial and permanent, having a purpose that is independent of, not incidental to, the purpose of any other structure or proposed structure for the purposes of section 26-102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If section 26-102 of the ITAA 1997 did not apply to prevent a deduction, would you be entitled to a deduction for the full value of holding costs where the land is rented for a nominal amount?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own the land.

The land is approximately X square metres.

You estimate that the land is valued at $X.

There is a shed erected on the land (the shed). The shed;

•         is secured to a concrete foundation

•         has solar panels installed on its roof

•         has an adjoining undercover area, and

•         has a roller door.

The shed, including the adjoining undercover area, covers X square metres of the land.

You rent the land, including the shed, to your neighbour for a nominal amount.

The neighbour uses the land and shed for storage purposes, including to store farming equipment and machinery.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Reasons for decision

Question 1

Summary

In reference to the indicia of vacant land under section 26-102 of the Income Tax Assessment Act 1997 (ITAA 1997), it is accepted that the shed is permanent and is in use and available for use. However, the shed is not substantial and does not have a purpose that is independent of, not incidental to, the purpose of another potential or proposed structure. Therefore, section 26-102 of the ITAA 1997 applies in your circumstances to limit the holding costs you are entitled to claim in relation to the land.

Detailed reasoning

Claiming Deductions for Vacant land

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However, you cannot deduct a loss or outgoing to the extent that it is capital, private and domestic in nature, or incurred in gaining exempt income.

Section 26-102 of the ITAA 1997 effects the deductibility of expenses incurred on or after 1 July 2019 that relate to holding vacant land, such that it disallows deductions for expenses associated with holding vacant land that would otherwise be deductible under section 8-1 of the ITAA 1997. However, you may be excluded from the operation of this section if the land is used in carrying on a business.

The meaning of vacant land, for the purposes of section 26-102 of the ITAA 1997, is land that has 'no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure'.

Relying on the meaning of vacant land outlined above, the three tests used to determine whether section 26-102 of the ITAA 1997 applies are:

•         Is there a substantial and permanent structure on the land?

•         If there is a structure, is it in use or available for use?

•         If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure?

Test One: Is there a substantial and permanent structure on the land?

Substantial

The Explanatory Memorandum to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (the Explanatory Memorandum) at Chapter 3 explains the law relating to limiting deductions for vacant land. The Explanatory Memorandum provides that, to be substantial, a building or other structure needs to be significant in size, value or some other criteria of importance in the context of the relevant property. A structure will not be substantial if it only has value as an adjunct to another structure, such as a residential garage or letterbox (Explanatory Memorandum paragraphs 3.18 - 3.19).

The context of the land, in your circumstances, is that it is located within a residential suburb. Generally, the purpose of residential land is to be used for owner-occupied housing. The shed does not significantly contribute to this purpose as it is not a residential structure. The shed on the land covers X square metres and the land is a X square metre block. The size of the shed is insignificant in comparison to the size of the land, therefore it is not accepted that the shed is significant in size in the context of the land. Additionally, you estimated that the land is valued at $X. Therefore, given the size and function of the shed, it is not considered that the shed is significant in value having regard to the overall context of the land.

In summary, it is not accepted that the shed is a substantial structure.

Permanent

To be permanent, a structure needs to be fixed and enduring and not have been built for a temporary purpose (Explanatory Memorandum paragraph 3.20). In your circumstances, the shed is affixed to a concrete foundation, has a roller door and solar panels attached on the roof. These features indicate permanency, and it is therefore accepted that the shed is a permanent structure.

Test Two: If there is a structure, is it in use and available for use?

The shed is used to store farming equipment and machinery. You also rent the shed to your neighbour for a nominal amount. Therefore, it is accepted that the shed is in use and available for use.

Test Three: If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure?

Whether a structure has an independent purpose that is not incidental to the purpose of another structure is a question of fact. This requires consideration of the context of the structure, land on which it is located and any other structures that have been, are in the process of being, or may be expected to be constructed on the land (Explanatory Memorandum paragraph 3.21). Importantly, structures that have the purpose of increasing the utility of another structure are not considered to be independent (Explanatory Memorandum paragraph 3.22).

In the context of land in a residential suburb, it is the general rule that even if a garage or shed is considered to be permanent and substantial, the structure does not have a purpose independent of any potential, proposed or existing main residence on the land. The purpose of the garage or shed structure is to increase the utility of the main residence (Explanatory Memorandum paragraph 3.23).

You rent the land, including the shed, to your neighbour for storage. Although there is no existing or proposed main residence on the land, this indicates that the shed has a purpose that is incidental to the use of another structure, such as a main residence. Also, considering the context of the land (being within a residential suburb) and having regard to the size and value of the shed in comparison to the size and value of the land, the shed is not an independent structure. The shed is incidental to another structure, such as a main residence, that may be expected to be constructed on that land.

Question 2

Summary

Even if section 26-102 of the ITAA 1997 did not apply to prevent a deduction you would not be entitled to a deduction for the full amount of holding costs incurred in relation to the land where the is rented for a nominal amount.

Detailed reasoning

The answer to Question 1 of this Notice of Private Ruling held that you are not entitled to a deduction for costs you incur in holding the land pursuant to section 26-102 of the ITAA 1997. Even if the answer to Question 1 had been favourable, you would not be entitled to a deduction for the full amount of holding costs incurred in relation to the land in circumstances where it is rented for a nominal amount.

Section 8-1 of the ITAA 1997 provides that you are only entitled to a deduction to the extent the loss or outgoing is incurred in gaining or producing assessable income. In circumstances where only a nominal amount of rent is charged, it is not considered that all expenses related to the land are incurred solely for an income producing purpose.

Taxation Ruling TR 95/33 Income Tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses or outgoings considers the relevance of a taxpayer's purpose, motive or intention in determining the availability of an income tax deduction under section 8-1 of the ITAA 1997 or in considering negatively geared investments. In your circumstances, where you rent your land to your neighbour for a nominal amount in a non-arm's length arrangement, it is not accepted that your only purpose and intention in holding the land is to earn assessable income. To some extent, you hold the land and incur the expenses associated with holding the land for a private purpose. Therefore, in accordance with TR 95/33 at paragraph 14, it would be reasonable to limit the value of deductions you can claim that relate to the property to the amount of nominal rent received per income year even if section 26-102 of the ITAA 1997 did not apply to prevent a deduction.