When S.26-102 Denies Deductions for Vacant Land Holding Costs
S.26-102 specifically restricts the deductibility of costs associated with holding vacant land. This applies to expenses incurred from 1 July 2019 onwards, regardless of the date the land was purchased. The primary focus is on the specific land related to the holding cost, typically defined by a single property title. However, there are situations where the costs may be linked to only a portion of a titled land or span multiple titles, as explained in paragraph 3.16 of the Explanatory Memorandum (EM).
Key Point: Adding Non-Deductible Costs to Cost Base
While you cannot carry forward deductions denied under these rules to later years, you can incorporate these non-deductible costs into the property's cost base for Capital Gains Tax (CGT) purposes. This is applicable if the asset (land) was acquired post-20 August 1991 and falls under the third element of the asset’s cost base according to S.110-25(4).
Implications for Cash Flow and CGT Events
The introduction of the 'vacant land' provisions can have a significant impact on cash flow since the financial benefits of adding costs to the cost base are only realized at the time of a CGT event, such as when the land is sold. However, even this benefit can be mitigated:
- CGT Concessions: If the sale of the land qualifies for CGT concessions (like the general discount or the small business 15-year exemption), the advantage of having a higher cost base (and thus potentially lower capital gain) could be diminished.
- Acquisitions Pre-20 August 1991: For lands purchased on or before 20 August 1991, costs that are not deductible under these new rules cannot be added to the cost base, potentially worsening the financial outcome for the taxpayer.
Furthermore, it’s important to note that non-deductible holding costs do not contribute to the reduced cost base of the property. Therefore, they cannot be used to generate or increase a capital loss.
Conclusion
Understanding the implications of S.26-102 is crucial for managing the financial aspects of holding vacant land, particularly considering its effects on tax liabilities and potential capital gains calculations. Property investors should plan accordingly, keeping in mind the timing of property transactions and the specific rules regarding cost-base adjustments.
Should you have any questions or need assistance, feel free to reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.
