Topics on holding costs for 'vacant land' (1) - Costs incurred before 1 July 2019

Deductibility of Holding Costs for Vacant Land

Under S.8-1, taxpayers can typically claim costs incurred for holding vacant land if the land is held for:

1. Gaining or Producing Assessable Income: This includes costs like interest on borrowings and rates if the land generates rental income.
2. Carrying on a Business: Holding costs can also be deductible if the land is used for business purposes to produce assessable income.

Pre-Income Deductions and Steele's Case: In Steele v FCT [1999] HCA 7 ('Steele’s case'), it was established that holding costs incurred before vacant land produces assessable income may still be deductible, particularly during the initial planning and construction phase of rental or business premises. The ATO's Taxation Ruling (TR) 2004/4 acknowledges this, outlining conditions for deductibility:

• The expense aims to gain or produce relevant assessable income (e.g., future rental income).
• Efforts are ongoing to pursue that end.
• The expense isn't incurred excessively early or as a mere prelude to income-earning activities.
• The period of pre-income expenses doesn't sever the necessary connection between expenses and assessable income.

Impact of S.26-102: S.26-102 seeks to limit deductions that would otherwise be allowable under S.8-1, essentially targeting scenarios like those covered in Steele's case.

This change suggests a shift in the deductibility landscape for holding costs related to vacant land, potentially affecting taxpayers' ability to claim such expenses.

For clarifications or personalized advice on deductibility of holding costs, reach out to Tax Ideas Accountants & Advisers at +61 2 8318 1545 or book an appointment through our live calendar.

• HOLDING COSTS FOR ‘VACANT LAND’ - OVERVIEW