Edited version of private advice

Authorisation Number: 1052362356461

Date of advice: 17 February 2025

Ruling

Subject: Deductions and vacant land

Question

Will the Commissioner allow you to deduct holding costs for vacant land beyond the third anniversary of the date that the residential structure used as a rental property was damaged by fire as provided in section 26-102(6)(d)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased the property at XX XX XX in MM 19YY.

You lived at the property from MM 19YY until MM 19YY.

You relocated to XX for work for a period of XX XX until MM 19YY.

You rented a room in the property to a friend from MM 19YY until MM 19YY.

You married in XX in MM 19YY and remain living in XX since MM 19YY.

You rented the property to third-party tenants through a real estate agent from XX 19YY until XX 20YY. Longstanding tenants abandoned the property without notice in MM 20YY.

On XX MM 20YY the building was destroyed by fire.

The insurance assessor was of the opinion that the contamination and extent of ignition and smoke damage rendered the building a total loss and should be demolished. The dwelling also contained asbestos sheeting in the wall cavities and under the dwelling.

Between MM 20YY and MM 20YY, you lodged insurance claims and received amounts from the insurers covering: 12 months loss of rent, demolition of the remaining structure and reinstatement of the building, and contents insurance.

During this period, you also sought quotes for the cost of demolition, council permission to demolish, advice from architects and builders on options regarding re-build of a dwelling from XXXX home builders and commissioned a survey of the block.

In MM 20YY the dwelling was demolished, and the asbestos removed. The land is now vacant and contains no substantial or permanent structures.

In MM 20YY you submitted a planning application to council to subdivide the land to into two blocks with a dwelling built on each subdivision. You also undertook a tree survey of the block.

In MM 20YY council refused the application.

The site has a natural watercourse through the rear of the land. You considered the build of a granny flat as a XXXX construction over the watercourse. Between MM 20YY and MM 20YY your builder (of the XXXX homes) liaised with council regarding planning, flooding and drainage system, and you were provided a tender for a project home with granny flat.

From MM 20YY your intention is to build on the land either a duplex construction, subject to clarification on the state government legislation introduced on DD MM 20YY and approval from council, or a dwelling with a granny flat. You have also investigated the purchase of neighbouring property with a view to development.

You wish to deduct holding costs, including land tax, council and water rates, and maintenance costs for the vacant block.

You are a resident of XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Reasons for decision

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, or relate to the earning of exempt income.

Subsection 26-102(1) states that costs of holding land such as council rates, land tax and maintenance costs, can only be deducted where there is a substantial structure available for, or in use in producing assessable income at the time the expense is incurred. That is,lawfully able to be occupied and leased or available for lease.

Therefore, holding costs associated with the vacant land are not deductible until the new dwelling can be lawfully occupied and is available for lease. The vacant land rules are operative from the time the tenants leave the initial rental property.

Costs of repairs, renovation or construction of a structure on the land are not costs related to the holding of vacant land.

Where section 26-102 (ITAA 1997) prevents a deduction for holding costs, the expense may form part of the third element costs of owning the asset.

The operation of section 26-102 and paragraph 14 of Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land 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.

Subsection 26-102(6) provides that deductions for vacant land can still be claimed if there are exceptional circumstances.

An 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. This could occur by way of natural disaster, a building fire, or the discovery of asbestos.

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.

From the time the tenant(s) vacate the property and demolition, neither you nor any other party must not have used the property for any purpose.

In your case, your intentions during the period the dwelling was being demolished and rebuilt were to continue to use the property to produce assessable income.

Therefore, you are entitled to a deduction for expenses such as local council, water and sewage rates, land taxes and emergency services levies under section 8-1 of the ITAA 1997 during the period the property was undergoing demolition and rebuild for the period DD MM 20YY to DD MM 20YY and was not deriving rental income.