May salutations from CGH Accounting Services, from all our staff at both Ballarat and Torquay offices. The new office space in Ballarat is coming along nicely and we are very much looking forward to moving in there sometime in the middle of this year. The digs will herald a fantastic new era for our business. This month we thought we would blog about the changes to Vacant Land Tax Deductions, which, although having been in the pipeline for a while, are relatively recent. Some people will not be aware of the changes, and we know for certain that some of our clients are affected by them.
OVERVIEW:
The changes are designed to target ‘Mum & Dad Property Developers’. Previously, if you owned a block of vacant land, you were able to claim a number of tax deductions. But unfortunately, that is no longer the case.
Those deductions were related to vacant land (which you intended to build a rental property upon), relating to ‘vacant land holding costs’, and also deductible were associated financing costs. This included council rates, land tax, insurance, loan interest, maintenance and other sundry holding costs.
The new rules are retrospective, coming into effect retrospectively from 1 July 2019, but even if you owned the vacant land before then, the recent changes will apply to you as well. Essentially you are no longer able to claim tax deductions for the above outgoings in your rental property tax return. It does look as though you can still claim for loan establishment fees (a one-off borrowing cost, deductible across five years).
The new laws also concern land that may have a building on it – which is not considered ‘substantial’. No doubt there will be some interesting malarkey around this clause!
DEFINITIONS:
‘Vacant Land’ is land with no substantial and permanent structure on it that is in use or available for use.
‘Substantial Building’ is less clear. Obviously, a residence or business, but also a shearing shed or silo will fit the bill. But not an ordinary shed or garage. We definitely might see some interesting attempts to trick up certain structures in order to pass the substantial building criteria.
WHO IS AFFECTED?
This comes down to what sort of taxpayer you are, mostly. The new rules most certainly take aim at small time property developers – families looking to make a second income from building a rental property on a currently vacant block of land. It will apply to parcels of land which are in the name of trusts or self-managed super funds as well.
But if you are a company and the land is held in its name, the new laws should not affect you. The same goes for titles held by non-self-managed super funds, managed investment trusts and public trusts.
If you use your vacant land for the purpose of conducting business, you are also off the hook. This can relate to a number of commercial activities for which vacant blocks are utilised. It also includes the intention to build a block of apartments or a similar more substantial property development. It’s not as simple as declaring your building to be a business venture though. You are best to seek advice from professionals first, to establish how the Tax Office will perceive your project.
HOW WILL THE NEW LAWS BE APPLIED?
The most common ways in which we will see these new rules in action are in instances such as:
- You/you and your wife, husband or partner/your family/family trust buys a vacant block of land looking to build a house on it to lease out. Formerly, you would have been able to claim expenses such as council rates and interest paid on the loan – for every month right up till the time you get your ‘notice of completion’. This can no longer be done.
- You/you and your wife, husband or partner/your family/family trust buys a property and you knock down the existing house. Your plan is to build a house or duplex on it to sell when completed. Before, you could have claimed all the above-mentioned costs, but alas, not any more. This would be seen as a profit-making exercise rather than a business move, so holding costs between the time you demolish the old place and receive your all-important notice of completion, cannot be claimed.
CAN I STILL CLAIM SOME HOLDING COSTS ON VACANT LAND?
Yes, there are still things we have up our sleeves. We can now add these costs to the overall cost base for the property. In this way, capital gains tax can be minimised, when it comes to selling. This process is best handled by your accountants, and it can take time for you to reap the rewards. Talk to us about re structuring your property and/or business legal structure for other ways to best deal with the new vacant land laws.
SHOULD I CHECK OUT THE DETAILS MYSELF?
We reckon the below is all you really need to know. Leave the rest to us.
Deductions for vacant land
Deductions that you can claim for holding vacant land, for expenses you incurred on or after 1 July 2019, are now limited. This applies to land you held before or from 1 July 2019.
Your land is considered vacant if, at the time you incurred the expense:
- the land did not contain a substantial and permanent structure, or
- the land contained a substantial and permanent structure that is residential premises, but the premises
- could not lawfully be occupied, or
- was not rented out or made available for rent
You can still deduct vacant land holding costs if:
- the land is held by an ‘excluded entity’, that is a
- corporate tax entity
- superannuation plan (other than a self-managed fund)
- managed investment trust
- public unit trust
- unit trust or partnership of which all the members are corporate tax entities, superannuation plans, managed investment trust or public unit trust
- the land is used to carry on a business by
- you
- your affiliate or an entity of which you are an affiliate
- your spouse or child under 18 years old
- an entity connected with you
- you, an affiliate (as listed above), spouse or child, or an entity connected with you, are carrying on a business of primary production and the land is leased or hired to another entity
- you make the land available at arm’s length to a business for use in that business
- a substantial and permanent structure was on the land but an exceptional circumstance occurred that resulted in the land becoming vacant
For additional information, contact CGH Accounting Services directly, or use the link below: https://cghaccounting.com.au/contact/rental-property-schedule/
Well, that’s all for now folks, we hope this bulletin helps anyone who may be impacted by these developments. We will see you here again in June, when we will hopefully have an exciting update about the new substantial and permanent structure on our land in Ballarat…
