Hoping to claim tax deductions on your vacant land? You need to meet a number of strict conditions to claim for costs such as interest payments on relevant loans, land taxes, council rates and maintenance costs.
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.
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.
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.
Importantly, the ATO recognises that exceptional circumstances outside your control may occur (eg a natural disaster or major building fire) resulting in the loss of the structure on your land, or that structure being disregarded. Under those circumstances, an exemption may apply, allowing deductions for holding costs of vacant land to be claimed for a limited period.
