Sep 2021 3 Minutes
Expenses Associated with Vacant Land – ITR 2021/D5
Effective from 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land for individuals, trusts and partnerships. Some exclusions apply, such as when the land is used in carrying on a business.
While the relevant rules refer to ‘vacant land’, the rules require testing of the following:
- Whether there is a substantial and permanent structure on the land;
- If there is a structure, if it is in use or available for use; and
- If the structure is available for use, whether it is independent of and not incidental to the purpose of any other structure, or proposed structure on the land.
The ATO released TR 2021/D5 on 4 August 2021 which sets out the Commissioner’s view on the application of the vacant land expenses limitation. A significant part of the ruling is dedicated to the three questions listed above.
The ruling states that a substantial structure is “significant in size, value or some other criterion of importance in the context of the property. To be permanent, a structure needs to be fixed and enduring.”
To consider whether a structure is in use or available for use will firstly need to be determined based on the purpose of the structure. In the context of residential premises, it must be capable of being occupied. Residential premises constructed or substantially renovated are considered to be available for use when they are ‘lawfully able to be occupied’, which would typically occur when a certificate of occupancy is issued.
Once it has been determined that the permanent structure is in use or available for use, it is necessary to consider whether the structure has an independent purpose in the context of the land on which it is located. Structures that have the purpose of ‘increasing the utility’ of another structure are not considered independent. For example, in the context of residential land, fencing or a garage, although substantial and permanent structures, do not have any purpose independent of the main residence. The purpose of such structures is to increase the utility of any existing or proposed residence on the land. Therefore, in this example, simply erecting fencing or building a garage will not suffice in order to claim deductions associated with holding the land.
For individuals, trusts and partnerships owning land, it is necessary to analyse any structure that is on the land in order to determine whether any costs associated with the land are deductible. While there may be a permanent structure on the land, unless it is used or available for use and has a purpose independent of any other structure, expenses incurred will not be tax deductible.
If you have any queries in relation to the above, please contact Jane Chiang.