Edited version of private advice

Authorisation Number: 5010075524535

Date of advice: 29 July 2021

Ruling

Subject: Deductions - vacant land - business-holding costs

Question One

Would the holding costs be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question Two

If so, would section 26-102 of the ITAA 1997 prevent the deduction of the holding costs?

Answer

No

This ruling applies for the following:

XXXX to 30 June XXXX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

XXXX are equal shareholders in a private company XXXX trading as XXXX. XXXX is a connected entity of XXXX.

In XXXX, XXXX purchased a XXXX business. XXXX had been searching for a new site to operate from due to the previous site not meeting their current and future operational needs.

In XXXX, vacant land was purchased by XXXX for XXXX plus costs with the intention of developing the land for their business's use. The land was purchased to develop a purpose-built building for the exclusive use of XXXX.

In XXXX, design and architect services commenced.

No part of the site is used for residential purposes.

In XXXX preliminary early work commenced on the vacant land and in XXXX, the building works were well under way.

There were no substantial and/or permanent buildings or other structure that was in use or available for use on the land when purchased. The whole complex was built at once as one major construction.

XXXX incurred XXXX in property improvements and holding costs of XXXX for the year ended XXXX.

The development was completed in XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for XXXX.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The holding costs are deductible under section 8-1 of the ITAA 1997

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, or is necessarily incurred in carrying on a business for that purpose. However, you cannot deduct a loss or outgoing under this section that is of a capital, private or domestic nature.

Taxation Ruling TR 2004/4 considers the deductibility of interest expenses incurred prior to the commencement of income earning activities, and interest expenses incurred after income earning activities have ceased.

The view that the deductions could be claimed under section 8-1 by the taxpayer in this situation is supported under TR 2004/4 where:

•                    the funds borrowed for the property were 'solely intended to be employed in income earning operations'

•                    'the period of interest outgoings prior to the derivation of relevant assessable income is not so long'

•                    'continuing efforts were undertaken in pursuit of' assessable income.

Having considered your circumstances and the relevant factors, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for holding costs related to the vacant land prior to the earning of assessable income.

The holding costs are not denied under section 26-102 of the ITAA 1997

Division 26 of the ITAA 1997 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.

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 (ie 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.

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.

From the information provided, you satisfy the requirements in section 26-102, as during the relevant financial year construction of the building was being undertaken for use by an entity connected with you in a business that is currently being carried on.

The provision does not result in limiting the deductions because the loss of outgoing is related to land in use, or available for use, in carrying on a business. Section 26-102 of the ITAA 1997 would not prevent deductions being claimed for the holding costs incurred by JCH in relation to the vacant land.