Tax Integrity Implications for Rural Land Holders in Australia

The Federal Government is looking to improve the integrity of the tax system by cracking down on certain tax deductions associated with holding vacant land. Announced within the 2018-19 Budget, these measures are currently before Parliament.

It’s part of a bid to reduce land banking and encourage housing development across future metropolitan areas. The measures mean landowners can only claim a tax deduction if the property is:

  • earning assessable income, or
  • being used or held available for use in the course of carrying on of a business.

The measures will only apply to individuals, trusts (excluding certain widely-held trusts), and self-managed superfunds (SMSFs).

As the legislation is currently drafted, many rural landholders will be caught up in the changes. This is because the definition of ‘vacant land’ will likely encompass most rural landholdings where there is no substantial and permanent building or other structure in use or available for use on the land.

Where the new rules apply, land holding expenses, including interest on borrowings, would no longer be tax deductible, but instead, potentially added to the cost base of the asset.

The proposed legislation will not apply if the land is used in a business carried on by the landholder or certain related parties: their spouse, children under age of 18, their “affiliates” or “connected entities”.  However, this concession is limited.

It extends to certain family relationships (i.e. spouse and/or children under the age of 18), but does not include adult children, siblings or other relatives. As an example, mum and dad retain the land and residual debt, and lease or agist the land out to their adult children. Mum and dad may no longer be entitled to a tax deduction for the interest expense, despite the fact they would still be required to treat the lease or agistment income as assessable.

Taking this further, and with the same scenario but the adult children having chosen to operate the business through a trust or a company, then again, it is possible that any holding costs incurred by mum and dad would no longer be deductible.

Compounding the effect of the proposed changes, the legislation does not allow for any exemptions of an existing landholders’ ability to continue claiming tax deductions. Therefore, this will apply to all relevant holding costs incurred from 1 July.

Any rural landholder who has attempted to deal with their succession plans over the past 20 or more years will understand that the cost of re-structuring landholdings makes changes in ownership an unattractive option.

However, if the proposed legislation is passed in its current form, taxpayers may find themselves in a position where they either pay more tax on an annual basis through a loss of deductibility, or potentially crystalise a large tax bill immediately in the form of capital gains tax and / or stamp duty to restructure.

The proposed changes would certainly impact how future succession and structuring plans are considered. It is recommended that rural landholders monitor the status of these changes and speak with their advisors to consider if they are impacted by these proposed changes.