With many farmers and breeders in Australia, especially in NSW & QLD, being affected by a severe drought, it gives me pleasure to pass on information relating to any type of financial relief for primary producers.
The relief is in the form of a ‘last minute’ change to a new tax law that would have affected their ability to immediately claim holding cost deductions on vacant land.
As part last year’s 2018 Federal Budget, the Treasurer announced that, from 1 July 2019, the ATO will deny deductions for expenses associated with holding vacant land that is being held for residential or commercial purposes.
The legislation for this new measure was finally passed in the Senate last week. Importantly, the Senate has made some crucial and practical amendments that will afford relief to many of the unforeseen victims (read primary producers) of the original vacant land provisions.
New Vacant Land rules overview
First, some background re these new vacant land rules.
From 1 July 2019, holding costs relating to ‘vacant land’ (such as interest, rates, insurance, land tax and maintenance costs) will not be deductible, if at the time of incurring them, there is no substantial and permanent structure on the land.
These are an integrity measure to address concerns that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. It will also reduce tax incentives for land banking, which deny the use of land for housing or other development.
Deductions that are denied under this measure will not be able to be carried forward for use in later income years. However, there is still tax effect for expenses for which deductions will be denied that would ordinarily be a cost base element (such as borrowing expenses and council rates) as they may be included in the cost base of the asset for CGT purposes when the property is sold.
These rules do not relate to companies. Ultimately, they are targeted at individuals, family discretionary trusts, and the majority of closely held partnerships and unit trusts, as well as SMSFs.
Exception if ‘carrying on a business’
Accordingly, the above exception does give instant relief for the farmer/breeder carrying on a primary production business as a vacant ‘back paddock’ of the property can still attract deductions if it can be argued as being part of the ‘business’. Property developers in businesses should also be comforted by this, as many ‘land bank’ as part of their activity.
The potential problem – farmers/breeders leasing vacant land
Farmers will often lease out their ‘vacant land’ if superfluous to their needs or as a valuable extra stream of income. The latter more common in this drought period where normal farm income has reduced dramatically for many.
Where the above leasing occurs, the farmer can no longer rely on the ‘carrying on a business’ exception and thus would be unable to deduct the holding costs for this portion of the property. Thus, they will end up declaring the income from the leasing of the vacant land without being able to claim deductions for legitimately incurred holding costs! This was particularly the case in a number of common scenarios, including:
- Where primary producers/breeders leased or agisted vacant land (surplus to their needs) to a neighbouring and unrelated farmer; and
- Where retired primary producers/breeders leased or agisted vacant land to their adult children so they could continue to conduct the family primary production business.
Senate amendments provide relief to primary producers
As a result of extensive industry pressure, the law has been passed with a number of amendments to reduce likelihood that these laws will result in manifestly harsh or unfair outcomes, i.e. where primary producers lease vacant land on their business property.
An amendment will allow relief for primary producers where all of the following applies:
- The (vacant land) is under lease, hire or licence to another entity;
- The farmer/breeder or a related entity is carrying on a primary production business;
- The land does not contain residential premises; and
- Residential premises are not being constructed on the land.
Example – Agistment of fenced paddock (vacant land) to unrelated neighbor
Jack owns several lots of vacant land on which a breeding business is carried on by his Family Trust.
Two of the lots (on separate titles) have now become surplus to Jack’s and the Family Trust business needs. The lot comprises fenced paddocks and contain no substantial and permanent structures.
Jack leases these lots to his neighbor, Sam, who will use them in his own farming business.
Under the original vacant land proposals, Jack would have been fully assessable on the agistment income derived, however he would have been denied deductions for any legitimately incurred holding costs.
However, under the new amendments, Jack will now be able to continue to claim deductions for the holding costs, as:
- The (vacant land) is leased to Sam (i.e. another entity);
- Jack’s family trust is connected to him and it conducts a primary production business;
- The land does not contain residential premises; and
- Residential premises are not being constructed on the land.
Relief for vacant land used to carry on any business
Please also note that not only did primary producers get relief under the amendments, given that any taxpayer that leases land to another entity at arm’s length (related or otherwise) will also be able to deduct holding costs, however that land must be used in any business, carried on by any person/entity. Two other conditions noted above must also apply, i.e. the land does not contain residential premises and residential premises are not being constructed on the land
Please contact me if you wish for me to clarify or expand on any of the matters raised in this article.
PAUL CARRAZZO CA
CARRAZZO CONSULTING
801 GLENFERRIE ROAD, HAWTHORN, VIC, 3122
TEL: 1300 RIGHT TRACK or 03 9982 1000
FAX: (03) 9815 1899
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web Site: www.carrazzo.com.au
