Tax Deductions for Vacant Land (Mar 25 Tax Update)

Relevant For:

Property owners, investors and business owners seeking clarity on claiming tax deductions related to vacant land.

Key Points:

• Vacant land lacks a substantial permanent structure or has an uninhabitable/unoccupied residence.
• From 1 July 2019, tax deductions for holding vacant land were restricted.
• Costs of owning vacant land are typically non-deductible unless specific conditions are met.
• Deductions are available if land is used in business (with no residence), primary production or held by certain entities.
• Temporary exemptions apply for events like fire or natural disasters.

Full Article:

For property owners, the question of when holding costs on vacant land are tax-deductible can often lead to confusion. The Australian Taxation Office (ATO) has criteria about what constitutes vacant land, and it’s crucial to understand these rules to avoid missing out on legitimate deductions—or mistakenly claiming them.

What Counts as Vacant Land?

According to the ATO, your land is considered vacant if it meets one of two conditions:

1. No substantial and permanent structure is present; or
2. If there is a structure, it’s a residential property that’s been recently built or substantially renovated during your ownership but is either not legally able to be occupied yet or isn’t currently occupied.

Structures like sheds or temporary buildings don’t qualify as substantial and permanent. To pass the test, any structure should ideally be a proper residential building, fully constructed or substantially renovated during your period of ownership.

What Changed in 2019?

Significant changes took effect on 1 July 2019, limiting your ability to claim deductions for costs associated with holding vacant land. Previously, holding costs were often deductible even if the land wasn’t being actively used but was intended for future development or rental.

Under the new rules, such deductions are denied except in specific circumstances.

When Can You Claim Deductions?

You can still claim deductions if you fall into one of these categories:

• Specific entity types: Managed investment trusts, corporate entities or superannuation funds holding the land for investment purposes.
• Business use: The land is actively used in your business or leased to another business, provided there’s no residential property already built or under construction.
• Primary production businesses: If the land is actively used by you, your spouse or an affiliated entity for farming or other primary production activities, deductions are allowed—again, provided no residential structure exists on the land.

Special Circumstances – Temporary Exemptions

The ATO recognises exceptional situations, such as natural disasters, fires or other unforeseen events resulting in the destruction or severe damage of your property’s structures. In these cases, temporary exemptions may apply, allowing deductions for a limited period until the structure is rebuilt or replaced.

Why This Matters for You

Navigating these rules properly can significantly impact your tax position. Incorrectly claiming deductions can lead to penalties or missed opportunities to legitimately minimise tax.

If you’re uncertain about your eligibility to claim deductions on vacant land, or if your circumstances have recently changed, reach out to our team.