Edited version of private advice

Authorisation Number: 1052172402594

Date of advice: 28 September 2023

Ruling

Subject: Deductions - vacant land

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expenses incurred for your Property?

Answer 1

No.

Question 2

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for the holding costs incurred from XXXX to when the construction is completed for your Property?

Answer 2

No.

This ruling applies for the following periods:

Year ended XX June 20XX

Year ended XX June 20XX

Year ended XX June 20XX

Year ended XX June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

You purchased the Property.

The Property included a one-story single dwelling with a garage.

You made the Property available for rent after purchasing.

You made a deposit with a builder to begin planning and constructing two dwellings on the Property while demolishing the existing dwelling and garage. The contract was finalised with builder and you were informed that construction would likely commence several months after.

Your tenant vacated the Property. Due to the impending demolition, you informed your real estate agent that we could only offer short leases to any new tenant.

A new tenant moved however they vacated the property early. Following the tenant leaving, your real estate agent declined further short-term leases due to the demolition timeframe and COVID-19 pandemic.

You were informed by the builder that the dwelling and garage could only be demolished in XXXX due to the impact of COVID-19 and securing skilled trades people.

The Property remained vacant from XXXX to XXXX when it was then demolished.

You have provided a timeline of events.

You do not work in the property development or construction industry.

You have not subdivided the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Reasons for decision

Issue

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expenses incurred for your Property?

Summary

No.

Detailed reasoning

Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 of a capital, private or domestic nature.

Outgoings in respect of an empty rental property will only be deductible if the property is genuinely available for rent and there are active and bona fide attempts to let the property. This means that outgoings may not be deductible for any period during which the landlord does not actively seek to find a tenant (eg by listing the property with a real estate agent).

The concepts in Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land do not apply here as during the period you were not holding vacant land. The normal concepts of deductibility apply, and as the Property had an existing dwelling that could have been rented out or genuinely made available for rent but was not, any loss or outgoing in respect of the Property cannot be deducted.

Question 2

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for the holding costs incurred from XXXX to when the construction is completed for your Property?

Summary

No.

Detailed reasoning

Section 26-102(1) of the ITAA 1997 denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use. Paragraph 16 of TR 2023/3 states that to be available for use, premises must be capable of being occupied. In the context of residential premises, established residential premises are considered to be available for use unless they have been deemed unsafe to occupy by a council or relevant body.

Expenses related to holding vacant land, including land on which a residential rental property is either under construction or being substantially renovated, or which has a completed residential property that is not available for rent, are not deductible, regardless of when the land was purchased.

Here, you have demolished all dwellings on the Property and therefore there is no substantial and permanent structure in use or available for use to rent. Paragraph 58-60 of TR 2023/3 works to not disallow a deduction where there is a brief pause in tenancy because of minor repairs or renovations on a dwelling however this is contrasted to your case where your property has no dwellings to occupy, whereas the example in paragraph 60 of TR 2023/3 had the dwellings remain despite not being tenanted. Further, the operation of section 26-102 and paragraph 14 of TR 2023/3 means that your intention to use the Property to derive rental income is no longer sufficient by itself to claim a deduction for expenses where no income can be derived because the property is either not able to be occupied or not available for rent.

Section 26-102(6) provides that deductions for vacant land can still be claimed if there are 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. However, this exemption is only available if the exceptional circumstance causes an existing structure to cease being a substantial and permanent structure that is in use or available for use. This could occur by way of natural disaster, a building fire or the discovery of asbestos.

Here, the dwelling that use to exist on the Property was demolished intentionally to construct two new townhouses. By itself the COVID-19 pandemic and its effect on the availability of tradespeople is not an exceptional circumstance, and further, these circumstances did not demolish the dwelling or force you to demolish the dwelling and construct two dwellings on the Property. Therefore, the exemption in section 26-102(6) does not apply.