From 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land. Broadly, subsection 26-102(1) 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.
Subsection 26-102(1) clarifies that any interest or borrowing costs to acquire land are included as a cost of holding land. Examples of other costs of holding land include council rates, land taxes and maintenance costs.
In the context of section 26-102, we do not consider the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with construction), to be a loss or outgoing related to holding land.
Some exclusions apply. This draft Ruling explains the Commissioner’s view of the application and the exclusions of section 26-102 of the Income Tax Assessment Act 1997. The examples used in this draft Ruling all assume that the losses or outgoings described would be deductible if section 26-102 did not apply.
Ruling Example – Giovanna takes out a mortgage to purchase a vacant block of land in September 2019. Giovanna intends to build a house on the land (which she will rent out). Giovanna does not carry on a business. Giovanna takes out a separate loan for the construction of the house. Giovanna will not be able to claim a deduction for her interest expense which relates to acquiring the land until the house is lawfully able to be occupied and leased or available for lease. If a deduction is otherwise available for the construction loan interest expense, Giovanna will not be prevented from deducting the expense by section 26-102.
Let’s break down the ruling:
- Initial Situation:
- Giovanna buys a vacant block of land in September 2019.
- She intends to build a house on the land to rent out, but she does not carry on a business (so she’s not considered to be operating as a property developer).
- She takes out a mortgage to buy the land and then takes out a separate loan for the construction of the house.
- Interest Deduction Rules:
- The interest on the mortgage for the land cannot be deducted as an expense until the house is completed and is legally able to be occupied or is available for lease.
- This means that until the house is ready to be rented out, the interest expense related to the purchase of the land does not qualify as a tax deduction.
- Construction Loan Interest:
- The ruling also mentions the construction loan interest.
- It says that if Giovanna meets the general conditions to deduct the construction loan interest, section 26-102 of the tax law will not prevent her from doing so.
Explanation of the Last Two Lines:
- “If a deduction is otherwise available for the construction loan interest expense”: This means that if, under normal tax rules, Giovanna would be allowed to deduct the interest on the construction loan (for example, because the property is used to generate income), then she can claim that deduction.
- “Giovanna will not be prevented from deducting the expense by section 26-102”: Section 26-102 is a part of the tax law that limits deductions for interest expenses on vacant land. However, this section will not stop Giovanna from claiming the interest on the construction loan as a deduction, provided she qualifies for it under the general rules.
Summary:
- Giovanna can only claim a deduction for the interest on the land mortgage once the house is ready for occupation and available for rent.
- The interest on the construction loan can be deducted as long as it meets the general criteria for deductibility, and section 26-102 will not disallow this deduction.
