Claiming tax deductions for vacant land
Tax deductions on vacant land. What could be complicated about that? But as with all things tax, it’s not straightforward. Your bit of dirt needs to meet a number of stringent conditions to qualify as “vacant land” for tax purposes to allow you to claim for costs associated with it. When it was purchased, what kind of structures it includes, whether it’s farmland, whether there are or were plans to build a home or a rental property all come into play when it comes time to assess vacant land for a tax deduction.
Vacant land defined
So, what is vacant land? To satisfy the ATO, there are two basic tests:
- the land doesn’t contain a substantial and permanent structure; or
- if it does, then the structure needs to be a residence that was constructed or substantially renovated while the owner held the land, but that residence either can’t lawfully be occupied, or hasn’t yet been rented or made available for rent.
Examples of a substantial and permanent structure include a homestead on a farm, a commercial garage, fencing, a silo or a woolshed. Conversely, a residential garage or shed, pipes and powerlines, residential landscaping or a letterbox are not seen as substantial and permanent structures.
Before or after 2019?
A big shift in the tax approach to vacant land came with new rules introduced on 1 July 2019. These rules deny tax deductions claimed for costs incurred while owning vacant land, except in quite specific cases. Before the change of rules, owners of vacant land could claim a deduction for the costs of holding the land, if it were held for income-producing purposes or for carrying on a business to produce income. Deductible holding costs included interest on loans to buy the land, maintenance costs and council rates.
When you can claim
The good news is there are three situations that will allow you to claim deductions on vacant land. You will be able to claim if:
- you are a particular type of entity (eg a corporate tax entity, a superannuation plan or a managed investment trust);
- the land is used in business or leased to another entity for their business – but in this case the land must not contain an existing residence or one under construction; or
- the land is used by you, an affiliated entity or your spouse in the business of primary production, as long as there’s no residence in existence or being constructed on the land.
If your land is considered vacant land but these particular situations don’t apply, then you will not have the opportunity to claim any deductions.
If one of these situations do apply, a number of costs involved in holding vacant land can be claimed. These include ongoing borrowing costs, interest payments on money borrowed to buy the land, council rates, land taxes and maintenance costs.
However, the costs of or any interest or borrowings associated with repairing, renovating or constructing a structure on the land are excluded.
Exemption for exceptional circumstances
Importantly, the ATO recognises that exceptional circumstances outside your control may occur (eg a natural disaster, major building fire, or substantial building defects) resulting in the loss of the substantial/permanent structure on your land or the structure being disregarded. Under those circumstances, an exemption may apply, allowing deductions for holding costs of vacant land to be claimed for a limited 3-year period.