Under certain circumstances pre-1 July 2019, the ATO agreed that an interest deduction should be allowed for holding vacant land. Typically, the taxpayer’s argument was accepted where the interest was 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 intentions 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.
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:
- a property has been constructed on the land, it has received approval to be occupied and is available for rent; or
- the land is being used by the owner to carry on a business, including a business of primary production.
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.”
Interest deductions denied can form part of the CGT cost base, which means that we have a category of interest on capital account.
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 hear soon from Treasury and the ATO.
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