The Government has announced in the 2018-19 Budget that from 1 July 2019 it will disallow deductions for expenses associated with holding vacant land. Where the land is not genuinely held for the purpose of earning assessable income, expenses such as interest costs will be denied. It is hoped this measure will reduce the tax incentives for land banking which limit the use of land for housing or other development.
The Australian Taxation Office is currently reviewing individual tax returns for the 2016 financial year. In particular, properties which have large losses from interest expenses and no or little income.
Investigations are occurring where the Australian Taxation Office has identified continued large and long term losses from investments held by individuals. So far, the Australian Taxation Office’s focus is on interest incurred prior to assessable income because the investment property (be it units, factory, house etc) has not been constructed within a three year time period. A second focus area the ATO has identified is where there is a non-commercial purpose for holding the land (i.e. a rural parcel of land that receives a small amount of agistment income, but has significant deductions).
The Australian Taxation Office has a mandate to ensure that these matters are investigated and that government revenue is not misappropriated by taxpayers incorrectly making claims for deductions to which they are not entitled.
The concern is that, whilst taxpayers may have had an intent to acquire or build an income producing asset, over time there actions (or perhaps lack of activity) and other commercial factors have altered this purpose, and therefore the property holding costs (such as interest) may no longer be tax deductible.
If you have any concerns about interest deductions for vacant land, especially where you have been holding the land for a long period of time, please contact our office to discuss further.