LSB September 2019_Web

TAX FILES
No deductions for vacant land
PAUL TANTI, PARTNER, THOMSONS GREER
The Federal Government has
introduced a bill which denies tax
deductions for some taxpayers who own
vacant land.
Treasury Laws Amendment (2019 Tax
Integrity and Other Measures No. 1) Bill
2019 (Bill) was introduced into Parliament
on 24 July, 2019. If passed in its current
form, the new measures will apply from
1 July, 2019, regardless of when taxpayers
acquired the land.
The Bill denies some taxpayers
deductions for the cost of holding vacant
land. These costs will include interest,
other borrowing costs and other holding
costs such as rates and taxes.
The Explanatory Memorandum to the
Bill states that the purpose of the new
measures is to deny “taxpayers who have been
claiming deductions for the costs associated with
holding vacant land when it is not genuinely held
for the purpose of gaining or producing assessable
income” (EM paragraph 3.4).
The Bill does not apply to all taxpayers.
Those taxpayers which are exempt are:
• corporate entities;
• superannuation funds which are not
self-managed superannuation funds;
• managed investment trusts; and
• public unit trusts.
Therefore, the provisions effectively
apply to individuals, self-managed
superannuation funds and closely held
trusts (both discretionary trusts and unit
trusts). These entities will be subject to
the new provisions even if they have a
corporate trustee,
Proposed section 26-102 will deny
losses or outgoings relating to holding
land if “there is 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”.
If this provision denies the taxpayer
a deduction, the deductions will only be
available to the extent that the land is in
use or available for use in carrying on
a business conducted by the taxpayer,
persons related to the taxpayer or an entity
that is connected with the taxpayer. For
these purposes, related persons include
affiliates of the taxpayer, the spouse of the
taxpayer and any of the taxpayer’s children
who are under the age of 18.
38 THE BULLETIN September 2019
The “affiliate” and “connected with”
provisions are similar to those which are
contained in the active asset requirement
in the Capital Gains Tax Small Business
Concessions.
The new provisions apply to land on
a “Certificate of Title basis”. Therefore,
land comprised in one title may meet
the requirements whereas an adjoining
property, which is intended for the same
use but may not contain a substantial
and permanent structure, may result in
deductions being denied for that property.
For example, if a house is situated
on one title and a shed or garage is
being constructed on an adjoining title,
the land on which the shed or garage is
situated will not satisfy the “independent
purpose” requirement. Garages and sheds
and the like do not have an independent
purpose, but rather have a purpose which
is incidental to or related to the residential
premises (EM paragraph 3.23).
If the buildings on the land are
residential premises which are being
constructed or substantially renovated,
deductions will not be allowed until the
premises are available for use. This means
they must be lawfully able to be occupied
and are actually leased, hired or licenced
or available for lease, hire or licence. This
will effectively deny deductions during
the planning, construction and renovation
phases of building or renovating
residential premises.
The buildings on the land must be
substantial. The term “substantial” refers
not only to the size of the structure but
can also include value or some other
criteria of importance to the relevant
property (EM paragraph 3.18).
The substantial characteristic must be a
feature of the building on the land and not
of another structure which is situated on
other land.
If deductions are denied for a
particular property on the basis there is
no substantial and permanent structure in
use or available for use on the land with
an independent purpose, deductions will
only be available to the extent the land is
in use or available for use in carrying on a
business.
Whether a business is being carried
on will always be a question of fact. In
determining this issue, the treatment
of the land for other tax purposes will
be relevant. Therefore, the taxpayer’s
treatment of the gains from the
proposed property as income or capital,
its registration for GST purposes and
whether it considers itself to be carrying
on a business will all be relevant to the
question of whether the taxpayer (or its
affiliates or connected entities) is carrying
on a business.
Taxpayers who are subject to
these provisions should review their
landholdings to ensure that, to the extent
possible, they satisfy the requirements for
deductibility for holding costs in the 2020
financial year. B