The ATO have issued draft taxation ruling TR 2021/D5. The draft ruling provides guidance on circumstances where certain taxpayers, including primary producers, may be denied tax deductions for expenses associated with holding vacant land.
The vacant land provisions under section 26-102 ITAA 1997 came into effect on 1 July 2019.
The initial intent of the legislation was to deny tax deductions where there was no real intention to use the property to generate assessable income, however on practical application, the provisions also have the potential to deny deductions for primary producers.
Primary producers may take some comfort from the draft ruling with the ATO taking the view fencing, silos and sheds may be substantial and permanent structures for the purposes of the vacant land provisions.
The vacant land provisions do not apply to deny deductions if the substantial and permanent structure requirement is satisfied.
Whilst this appears to be a generous concession by the ATO, practically it requires detailed consideration and analysis of individual structures on farmland to determine if they satisfy the necessary criteria.
This analysis may present challenges for primary producers as silos and sheds for example, can vary in size, purpose and portability.
A silo could be a substantial concrete or steel structure fixed to a permanent base on the land, or it could also be a portable structure able to be moved while fixed to a tractor, trailer or other form of transportation.
Arguably the latter would not satisfy the substantial and permanent structure requirement. Fencing may exist on the outer boundaries of land used in a farming business however may not exist on individual titles that subsist within the broader farming property.
As indicated in the draft ruling, this will require assessment of the land on a title-by-title basis resulting in increased compliance costs.
The ruling does not adequately address the issue where residential property is located on farmland. The ruling provides an example where a residential property is used by a farm manager who is required to live in the property to oversee the farming operations.
Doubt remains around whether primary producers could lose deductions where a residential property exists on farmland and is either vacant or provided to a family member.
Where vacant land is not used in carrying on a business, but is leased to an independent third party, the landowner will need to take reasonable steps to ensure the land is being used in a business carried on by that entity.
If the lessee/tenant is not carrying on a business, for example, the land is being used for the agistment of horses or the storage of vehicles or plant not used in a business, the landowner will be assessed on the income, but denied deductions for holding the land.
What is apparent from this ruling is that primary producers will need to work closely with their accounting and tax advisers to determine if the vacant land provisions will impact on deductible land holding costs.
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