Date posted: 10/05/2018 5 min read

Interest deductions to be denied for holding vacant land

There can be instances where borrowing to buy a land bank creates an interest deduction. No more says the Treasurer.

In brief

  • Budget impacts interest deduction for acquiring vacant land
  • Impact on would-be property developers
  • Changes take effect from 1 July 2019

A deduction for interest incurred on a loan to acquire vacant land?

Doesn’t sound right to most people. After all, the land isn’t being used to produce income.

But there are in fact circumstances where the ATO currently agrees that an interest deduction should be allowed. Typically, the taxpayer’s argument is accepted where the interest is incurred on borrowed funds used to acquire a property that was solely intended to be used in income earning operations.

Why deny interest deductions?

Now the Government says it will deny deductions for all expenses associated with holding vacant land. This so-called integrity measure will “address concerns that deductions are being improperly claimed…where the land is not genuinely held for the purpose of earning assessable income”. In other words, figuring out the genuine nature of the taxpayer’s intention is all too hard, so let’s deny the deductions.

The real policy thinking appears to be combatting the practice of “land banking”, which is considered to contribute to a shortage of land for housing or other development.

The Budget announcement goes on to state when interest deductions can commence in respect of the investment.

What do the Budget papers say?

According to the Budget papers: “This measure will not apply to expenses associated with holding land that are incurred after: (i) a property has been constructed on the land, it has received approval to be occupied and is available for rent; or (ii) the land is being used by the owner to carry on a business, including a business of primary production.

Denying deductions during the construction activity stage is unlikely to go down well.

But then the deduction entitlements are further clouded by the statement that: “This measure will apply to land held for residential or commercial purposes. However, the ‘carrying on a business’ test will generally exclude land held for commercial development.” So it appears the 2nd limb of s8-1 of the Income Tax Assessment Act 1997 can come to the rescue.

Interest deductions denied can form part of the CGT cost base, which means that we have a category of interest on capital account. Steele’scase and Tax Ruling 2004/4 now need to be read in the context of this announcement.

When will the changes take effect?

The measure will take effect from 1 July 2019, although the announcement doesn’t make clear if pre-July 2019 borrowing arrangements are grand-fathered.

Hopefully, we’ll will hear soon from Treasury and the ATO about consultations on this Budget announcement, given the impact on financing projections.

Budget 2018 main highlights

Read our Budget coverage highlights in Acuity

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Taxation ruling TR 2004/4

Read about Steele’s case and the ATO’s Taxation Ruling TR 2004/4

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