If you’ve invested in vacant land with a view to building an investment property on it, the tax deductions you can claim have changed.

Effective July 1, 2019, expenses related to holding vacant land are no longer tax-deductible, regardless of ownership prior to that date. Previously, deductions were available for holding costs on vacant land purchased with the intent to build rental properties. These deductible expenses included loan interest, council rates, land tax, and insurance.

To claim deductions, demonstrating active steps toward building and renting the property was required. However, as of July 1, 2019, such deductions for expenses incurred are no longer permissible.

But the pain doesn’t end there. Even while the rental property is under construction, deductions for holding costs still can’t be claimed. In short, the property is still regarded as vacant land until the property is legally able to be occupied by law (for instance, when an occupancy certificate is issued) AND the property is actively marketed for rent.

Are there any exemptions to the rule?

While some may argue that a piece of land is not vacant if it contains certain structures like a garage, caravan, shed, or mailbox, the Australian Taxation Office (ATO) does not consider such structures for qualification. For tax purposes, a structure on the land must be substantial, permanent, and serve an independent purpose to avoid being classified as vacant.

Therefore, a house qualifies if it meets legal and advertising criteria for rental, whereas structures like garages do not meet the qualifications.

There are no immediate deductions. However, holding costs in relation to vacant land can be added to the tax cost base for capital gains tax (CGT) purposes. That will reduce the amount of CGT payable when the property is ultimately disposed of. But that could mean a long delay before property owners get any tax benefit!

Can you claim interest on borrowing to finance the construction of the property?

No. The ATO specifically highlighted borrowing costs associated with the purchase of vacant land and stated that additional interest on borrowing costs to construct the property are not caught by these rules. If you have only one loan, make sure you have proper documentation to confirm the split of interest between the purchase of the land (not deductible) and the cost of construction of the building (deductible).

I’ve bought a new-build apartment that is uninhabitable because of faulty cladding. It’s now sitting vacant. Am I caught by the new rules?

No. According to the ATO, if you rented out or had an apartment available for rent in a multiunit development that was found to have significant building faults and deemed uninhabitable, you should not be impacted by the changes and deductions can continue to be claimed as there is still a substantial structure on the land.

If you own vacant land or are looking to invest in land with a view to constructing a rental property, seek advice from a tax professional. In particular, if you are relying on the tax deductions to make a project financially viable, you may need to look again at your budgets and cash flows to assess whether the project is still viable.

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