Deductibility of expenses associated with holding vacant land
Broadly, tax law denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use.
You may not apply to you in certain cirmstances, such as if the land is used in carrying on a business, you lease the land to an entity carrying on a business, the land is held by primary producers, or you are a particular kind of entity, being a company, a super fund, a managed investment trust, a unit trust.
Leaving aside the above exclusions exclusions, there are 3 tests which determine whether the law applies to a land holding:
- Is there a substantial and permanent structure on the land?
- If there is a structure, is it in use or available for use?
- If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure on the land?
A substantial structure must be significant in size, value, or some other criteria of importance in the context of the property. To be permanent, a structure needs to be fixed and enduring.
You must consider whether any substantial and permanent structure has an independent purpose in the context of the land on which it is located. Structures that have the purpose of increasing the utility of another structure are not considered independent.
For example, in the context of primary production, fencing, silos and sheds are substantial and permanent structures that serve independent purposes. (TICK)
By contrast, in the context of residential land, fencing or a garage (though substantial and permanent structures) do not have a purpose independent of the residence. Rather, the purpose of these structures is to increase the utility of any existing or proposed residence on the land. (CROSS)
Understanding these nuiances in property tax law is important.
You can see examples in tax ruling TR2023/3.
