Important Tax Changes for Vacant Land Could Hurt Investors

New legislative changes to vacant land tax rules could negatively impact vacant land investors as amendments would put limits to tax deductions for expenses relating to vacant land properties.

Introduced to the Parliament on 24 July 2019 and passed by the House of Representatives on 31 July 2019, the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 is now before the Senate.

The bill, if passed and assented to, would essentially remove negative gearing for vacant land.

Important Factors of the Tax Change

The purpose of the change is to reduce incidence of taxpayers claiming tax deductions against vacant lands that are in fact not held to earn assessable income.

All lands with no “substantial and permanent building or structure” either in use or available for use is considered a vacant land.

A building or structure must also be independent and not incidental to any structure or even a proposed structure on that land.

A residential garage, for instance, is dependent and incidental to the main residential building and therefore does not qualify as a structure.

The Proposed Tax Changes on Vacant Land

The proposed changes will deny vacant land owners the legal ability to claim holdings costs like land taxes, council rates, maintenance costs, and borrowing costs, including interests for loans used to acquire the land.

This means that property investors seeking passive incomes, particularly those who borrowed funds to acquire a vacant land would be most hit by these new changes.

The new tax law is clear. Tax deductions for “losses or outgoings incurred that relate to holding a vacant land” will be denied unless the land is:

  • used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or
  • used or held available for use in carrying on a business by;
    • an affiliate, spouse or child of the taxpayer; or
    • an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.

In other words, a residential property investor cannot expect tax deductions until construction on their vacant land is complete and the property is on the market for rent.

The same can be said for an individual undertaking a one-off construction on a vacant land either for rent or resale.

In contrast, a property developer carrying on a business of property construction or development will be eligible for a tax deduction.

Other Exemptions for Tax Deductions on Vacant Land

The tax changes will not apply to:

  • corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts or public unit trusts; or
  • unit trusts or partnerships of which all the members are entities of the above types.

The table below compares the proposed tax law with existing law on vacant land tax deductions.

comparison of proposed tax law with existing law on vacant land tax deductions

The new rules will apply to individuals, trusts and self-managed super funds, and to any losses or outgoings incurred on vacant land on or after 1 July 2019, regardless of whether the vacant land was acquired before 1 July 2019.

The impact of these tax changes will definitely affect small and medium investors alike.

Do you need new strategies for reducing taxes or tax advice for your unique situation with the pending tax law on vacant land?

Contact a representative from Sphere Accountants & Advisors. We are here to help.