Ruling Compendium TR 2023/3EC







This Compendium of comments provides responses to comments received on Draft Taxation Ruling TR 2021/D5 Income tax: expenses associated with holding vacant land. It is not a publication that has been approved to allow you to rely on it for any purpose and is not intended to provide you with advice or guidance, nor does it set out the ATO's general administrative practice. Therefore, this Compendium does not provide protection from primary tax, penalties or interest for any taxpayer that purports to rely on any views expressed in it. | Summary of issues raised and responses: All legislative references in this Compendium are to the Income Tax Assessment Act 1997 , unless otherwise indicated. | The Explanatory Memorandum makes it clear that the provisions apply to lessees as well as landowners. This aspect should be included in the final Ruling. | Paragraph 5 of the final Ruling has been updated to include a footnote to reference that a lessee may also incur costs relating to holding land (consistent with paragraph 3.28 of the Explanatory Memorandum to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 (EM). | Black hole expenditure deduction under section 40-880 is only available to business capital expenditure. We invite taxpayers to engage with us to discuss their personal circumstances. | The effect of these provisions is likely to result in potentially substantial section 26-102 non-deductible holding costs associated with vacant land (which may be genuine trading stock of an active business). | We appreciate the ATO's only potential solution to the above issues might be a concessional 'substantial and permanent structure' interpretation to reduce instances of land being vacant. However, this may not assist residential property developers due to subsection 26--102(4). | Developers who hold their land in trusts will have to meet the tests of being in business or being a connected entity (noting discretionary trusts cannot be affiliates), per subsection 26-102(2). | It is suggested that many landholders (including those with residential premises constructed or substantially renovated before 1 July 2019) and their professional advisers may be unaware of this issue and how to practically manage it to ensure holding costs remain deductible. | The draft Ruling only discusses the meaning of 'in use or available for use' in the context of residential premises. It is suggested the final Ruling should also address the meaning of being 'available for use' in the context of commercial premises. | The distinction between established properties and newly-constructed or substantially renovated properties is a product of the function of subsection 26-102(4). | We have also updated paragraph 20 of the final Ruling to include a footnote that references that: | It is highly likely that many landholders and their professional advisers are unaware of the consequences of this broad definition. Extensive and clear taxpayer education to alert affected land holders to the non-deduction risk and how it should be addressed is likely to be required. | Would permanent and substantial structures beneath the land's surface (such as irrigation piping, or mining infrastructure) qualify as permanent and substantial structures? | Whether something is a substantial or permanent structure will be dependent on the facts and circumstances and the context of the land. The land may also be excluded from the operation of section 26-102 depending on whether the land is being used in business or primary production. While paragraph 3.22 of the EM provides that structures that exist to support the use or functioning of another structure, such as pipes or powerlines, will not satisfy this requirement, we consider that irrigation piping or mining infrastructure may be substantial structures depending on the context of the land. | If Example 1 of the draft Ruling was not in a primary production context, but rather a 'lifestyle' Airbnb or longer-term residential property would the outcome be the same? | The structure in Example 1 is an 'established house', meaning that subsection 26-102(4) does not apply. In this example, the primary production context does not affect the outcome. | If a suburban residential property and an associated swimming pool or tennis court were on separate titles, would the ATO be likely to treat the pool or tennis court as a substantial and permanent structure? Would the outcome be different if there was a pool house or tennis court shelter on the title? | Clearer advice and examples will assist taxpayers. | If the 100 hectares in Example 1 of the draft Ruling were held under multiple titles, and there were no other permanent and substantial structures, would it only be the title containing the manager's residence that would not be considered vacant land? | Paragraphs 45 to 48 of the final Ruling confirm that the loss or outgoing will determine the area of land that is relevant for the purposes of section 26-102. This approach acknowledges that in most cases, holding costs will relate to land covered by a single property title, in which case the relevant land will be the land under that title. However, some holding costs may relate to only part of the land under a property title while others may relate to land covered by multiple titles. | It is requested that the final Ruling confirm the same analysis would apply to interest and borrowing expenses for loans obtained for: | In the context of section 26-102, we do not consider the costs of repairing, renovating or constructing a structure on the land, or any interest or borrowing costs (to the extent they are associated with repairs, renovation or construction), to be a loss or outgoing related to holding land. | Also, further explanation of what constitutes 'minor' is required, or removal of the word 'minor' all together. | The key phrase of the compliance approach is 'short periods of time when residential premises are unavailable for lease, hire or licence'. The term 'minor maintenance and repairs' is only used in an example of what may necessitate the short period of unavailability, it is not intended as a criterion for the compliance approach. | It is unlikely that more substantial improvements would allow for the compliance approach as the period of unavailability is unlikely to be 'short'. | Provide an example of a taxpayer who sells a former rental property untenanted and therefore any ongoing interest expense is not deductible due to the vacant land provisions meaning it was not deductible immediately before the sale of the property. | The final Ruling has been updated at Example 7 to include this scenario. | The draft Ruling does not adequately address the issue of property developers and whether land held for development is 'available for use'. Example 3.3 from the EM makes it clear that land held by property developers for future use is held in carrying on a business. A similar example should be included in the final Ruling. | Paragraph 39 of the final Ruling has been updated to address this. | The draft Ruling does not address a circumstance where a taxpayer has to dissect the land under a single title because it is being used for multiple purposes, and only a portion of holding costs will be deductible. | Paragraphs 45 to 48 of the final Ruling confirm that the loss or outgoing will determine the area of land that is relevant for the purposes of section 26-102. | The draft Ruling does not address the issue of whether a one-off profit-making venture is considered a business for the purpose of section 26-102 | The final Ruling makes it clear that whether the activities on the land amount to 'carrying on a business' is a question of fact determined by reference to the indicia of carrying on a business as set out in the case law. | The SPV may be a discretionary trust and hence subject to section 26-102. Considered in isolation, land held by the SPV may be deemed not to be in use, or available for use, in carrying on a business. | However, following Grollo Nominees Pty Ltd & Ors v The Commr of Taxation of the Cth of Australia [1997] FCA 659 the broader activities of the group should be considered in determining if the SPV is carrying on a business. | The draft Ruling should be amended to clarify that the business of an SPV trust must have regard to the broader group. | Paragraphs 39 and 40 of the final Ruling have been updated to address this. A number of entity types are excluded from the vacant land provisions under subsection 26-102(5). A discretionary trust is not an excluded entity from the vacant land provisions. Developers who hold their land in trusts will have to meet the tests of being in business or being a connected entity (noting discretionary trusts cannot be affiliates). | The compliance approach in the final Ruling has not been updated to include these points, as the list is a non-exhaustive list of the main factors to consider and it is unclear that the additional factors identified would point to the lessee being in business. | The draft Ruling will benefit from an example where the land is not trading stock or being physically used, but there are activities being undertaken (such as seeking zoning approval) so it could be used in business. | The final Ruling has been updated to include footnote 20 (at paragraph 37) which refers to the relevant ATO views on when an entity is carrying on a business. These views encompass at what point a business might commence. | The final Ruling has not been updated to include reference to the application of subsection 26-102(6). The ATO advice and guidance on this point is located on our webpage at Deductions for vacant land | Given the delay in providing guidance the Commissioner should take a lenient approach to penalties and interest where taxpayers need to amend returns based on the Ruling. | Note that the policy and legislation around shortfall interest charges and tax shortfall penalties already requires the Commissioner to consider the circumstances leading to the shortfall. | Interest incurred at investor level  the draft Ruling should clarify whether interest on borrowings to acquire equity in an entity that holds land is an outgoing relating to holding land. Our view is that only the outgoings of the entity that directly holds the land are outgoings relating to holding land. | However, footnote 1 of the final Ruling has been updated to note that a lessee may also incur costs relating to holding land. | The compliance approach at paragraphs 57 to 58 of the draft Ruling should be expanded to cover the general requirement for a structure to be in use or available for use in subsection 26-102(1) and not be limited to the unavailability of residential property coming within subsection 26-102(4). | We do not consider it appropriate to expand this approach for structures more generally. The types of structures that exist on land are infinitely varied as are the circumstances in which they become unavailable for use. | It is noted that the EM appears to have used a different test in paragraphs 3.10 and 3.29 where it refers carrying on a business 'by certain entities related to the taxpayer' (emphasis added). | Given the ambiguity further guidance by the ATO would be appreciated. | We note the final Ruling has been updated at paragraph 40 to acknowledge that particular entities are excluded from the application of the vacant land measures per subsection 26-102(5). | In addition, paragraph 37 of the final Ruling has been updated to note that whether a business is being carried on by an entity is a question of fact determined by reference to the indicia of carrying on a business as set out in case law. Further, footnote 20 (at paragraph 37 of the final Ruling): | The exception in subsection 26-102(8) would appear to apply to all land held by a primary production business, regardless of whether the land itself is used in primary production. For example, a business engaged in primary production in Perth may hold vacant land in Melbourne that is not used in primary production. It would appear they can still access the exception in subsection 26-102(8). ATO guidance on this issue would be welcomed.