Private ruling: Deductions for vacant land
Date of advice: 23 August 2022
Published: November 2022
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim interest expenses for the period when the land was vacant? | A1: No.

Relevant facts and circumstances: You purchased a vacant block of land. You purchased the land as joint tenants with Person B after 1 July 20XX. You built a house on the vacant land for the sole purpose of deriving rental income. Construction of the house was completed last year at which time you began renting it out. You have taken out a loan to enable purchase of the land and construction of the house.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 26-102

Reasons for decision: Summary: Subsection 26-102(1) of the Income Tax Assessment Act 1997 (ITAA 1997) denies a deduction for losses or outgoings relating to holding vacant land with limited exclusions. These exclusions include use of the land in carrying on a business, leasing the land to an entity carrying on a business and being an entity of the type specified in section 26-102 of the ITAA 1997. Subsection 26-102(1) of the ITAA 1997 provides that if: (a)at a particular time, you incur a loss or outgoing relating to holding land (including interest or any other ongoing costs of borrowing to acquire the land); and (b) at the earlier of the following (the critical time): (i) that time; (ii) if you have ceased to hold the land - the time just before you ceased to hold the land; there is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure; you can only deduct under this Act the loss or outgoing to the extent that the land is in use, or available for use, in carrying on a business covered by subsection (2) at the time applying under subsection (3). | Detailed Reasoning - Application to your circumstances: At the time the relevant interest expenses were incurred, you were not using the vacant land in carrying on a business, nor were you leasing the land to an entity carrying on a business. You were also not an entity of the type specified in section 26-102 of the ITAA 1997. Prior to construction of the house, there was no substantial and permanent structure in use or available for use on the land. Therefore, although you incurred interest expenses relating to your loan, you are denied a deduction for such expenses until such time as the house was lawfully able to be occupied and made available for or actually rented.