Claiming tax deductions on vacant land may seem straightforward, but like most things in tax, it’s not that simple. For your land to qualify as “vacant land” for tax purposes, it must meet a series of specific conditions. These include when the land was purchased, the type of structures on the land, whether it is farmland, and whether there are plans to build a home or rental property. All of these factors come into play when determining whether you can claim deductions for vacant land.

Vacant Land Defined

So, what exactly constitutes vacant land? To satisfy the ATO, there are two main criteria:

1. The land must not contain a substantial and permanent structure.
2. If the land does contain a structure, it must be a residence that was either constructed or substantially renovated while the owner held the land, but the residence:
   • Cannot lawfully be occupied; or
   • Has not been rented or made available for rent.

Examples of substantial and permanent structures include farm homesteads, commercial garages, silos, and woolsheds. On the other hand, structures like a residential garage, shed, pipes, powerlines, residential landscaping, or a letterbox are not considered substantial and permanent.

Before or After 2019?

A significant change in the tax treatment of vacant land came on 1 July 2019, with new rules that restrict the ability to claim deductions for costs incurred while holding vacant land. Prior to this change, owners of vacant land could claim deductions for holding costs if the land was used for income-producing purposes or for carrying on a business. Deductible holding costs included loan interest, maintenance costs, and council rates.

When You Can Claim

The good news is that there are three situations in which you can claim deductions for vacant land:

1. You are a specific type of entity (e.g., a corporate tax entity, superannuation fund, or managed investment trust).
2. The land is used in business or leased to another entity for their business – however, in this case, the land must not contain a residence or have a residence under construction.
3. The land is used by you, an affiliated entity, or your spouse in the business of primary production – as long as there is no residence on the land or one under construction.

If your land qualifies as vacant land but none of these situations apply, then you will not be able to claim deductions.

If one of these situations does apply, you can claim various holding costs, including:

• Ongoing borrowing costs and interest payments on loans taken to purchase the land.
• Council rates, land taxes, and maintenance costs.

However, costs related to repairing, renovating, or constructing a structure on the land, including associated interest or borrowings, are not deductible.

Exemption for Exceptional Circumstances

The ATO acknowledges that exceptional circumstances may arise that are beyond your control (e.g., a natural disaster, major fire, or substantial building defects) which may lead to the loss of a substantial/permanent structure on your land or the structure being disregarded. In such cases, an exemption may apply, allowing you to claim deductions for holding vacant land for a limited three-year period.

Tax treatment of vacant land is complex and involves a detailed assessment process. If you’re unsure about your situation, it’s important to seek expert advice before taking any action.