Tax Q&A: Will I still be able to claim the expenditure on the vacant block?

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Q: I bought 10 acres of land with an old house on it in 1992. In 2000, I found that I could subdivide it into two five-acre blocks, so I pulled down the old house and built a new one, leaving one block vacant. Even though it is under separate titles, this block rated as one block in total. I didn’t think to rent out the new house, and it remained vacant until 2007. I moved in in 2008 after it was paid for.

I spent over $300,000 on the vacant block for fencing, clearing pest weeds, subdividing and maintaining the old house up to 2006. I know the house will have some capital gains tax on it and the vacant block will have full CGT.

Will I still be able to claim the expenditure on the vacant block until I sell it, using this as a future cost base for CGT?

Thank you, Ed

A: You may be able to claim ‘holding costs’ for the vacant land as an income tax deduction. Holding costs include interest expenses, rates and land tax. They can be claimed in the 2018/19 fi nancial year or earlier, when you:

  • intend to use the vacant block to gain/produce assessable income and are genuinely working towards that end, and
  • the interim is not so long that the connection between current expenses and future income is lost, and
  • you do not change your mind; there can be no doubt that you intend to use the block to produce assessable income

The federal government proposed changes in the 2019 federal budget with regard to holding costs on vacant land, where the holding costs are incurred on/after 1 July 2019. This legislation has not yet been introduced to Parliament.

The proposed new rules only allow for the claiming of holding costs in the 2019/20 financial year and onwards when:

  •  a substantive permanent building/structure exists on the land, which is substantial in size and has an independent purpose or function, and

  • the building/structure is in use or ready for use

An exception to the above is when the vacant land is used or intended for use in carrying on a business, such as by a primary producer or a property development business. 

With regard to rentals, the main takeaway from the proposed legislation is that you can generally only claim holding costs after:

  • the rental property is constructed, and
  • it can be lawfully occupied, and
  • it is rented or genuinely available for rent 

In the interim, you cannot carry forward those holding costs and deduct them in later years. But you can add those costs to the cost base of the vacant land for capital gains tax purposes.

The cost base of the vacant block will include: 

  • a reasonable apportionment of the original purchase price, with consideration for demolishing the old house and subdividing the land
  • a reasonable apportionment of incidental expenses on purchase, such as legal fees and stamp duty 
  • costs of owning the property, including holding costs that have not been previously claimed
  • costs to increase or preserve the value of the property, such as the mentioned fencing, weeding and demolishing of the old house

You cannot carry forward holding costs and deduct them in later years. But you can add them to the cost base of the vacant land

There may be other factors to consider, so be sure to speak to your accountant regarding the full tax implications.

Need to know

  • Holding costs may be claimed as income tax deductions
  • Proposed changes to legislation will put limitations on holding cost claims.
  • Holding costs can be added to the CGT cost base.

David Shaw
is CEO of WSC Group

 

Have you got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

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