Leena Gurung
Leena Gurung
Assistant Manager
Grace Tiong
Grace Tiong

The Commissioner of Taxation (“Commissioner”) recently released finalised Taxation Ruling 2023/3 Income Tax: expenses associated with holding vacant land (“TR 2023/3”).

The ruling concerns the application of section 26-102 of the Income Tax Assessment Act 1997 (ITAA 1997) and supersedes Draft Taxation Ruling 2021/D5 Income tax: expenses associated with holding vacant land.


Section 26-102 was introduced effective 1 July 2019 to address integrity concerns regarding the availability of evidence to substantiate taxpayers’ intent in respect of holding costs deducted in connection with vacant land. Essentially, there was necessarily a heavy reliance on taxpayers’ assertions regarding the current intent in respect of the land, which inevitably caused a myriad of compliance and administrative concerns for the Commissioner and his officers.

Section 26-102 serves as an integrity measures to prevent deductions being claimed in relation to vacant land that may not be genuinely held for the purpose of gaining or producing assessable income.  

The Provision

Broadly, subject to a number of exceptions, subsection 26-102(1) denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use. Those exceptions are:

  • The land is used in carrying on a business;vacant land tax information
  • The land is leased to an entity carrying on a business;
  • The land is held by primary producers; or
  • The holder of the land is one of the following types of entities:
    • a ‘corporate tax entity’;
    • a superannuation plan that is not a self-managed superannuation fund;
    • a managed investment trust;
    • a public unit trust; or
    • a unit trust or partnership where each member thereof is one of the foregoing.

The Ruling

TR 2023/3 elucidates the Commissioner’s view with respect to the application of section 26-102 as well as his intended compliance approach.

Broadly, TR 2023/3 prescribes the following three tests for determining whether section 26-102 applies to a particular landholding:

1.    Is there a substantial and permanent structure on the land?

  • A structure is ‘substantial’ when it is considered significant in size, value, or by reference to some other relevant criteria of importance in the context of property.
  • A structure is ‘permanent’ when it is fixed to the land and enduring.

2.    If there is a structure, is it in use or available for use?. 

  • The purpose of the structure will partly determine what ‘in use or available for use’ means in context. 
  • Residential premises capable of being occupied will be considered available for use unless they have been deemed unsafe to occupy by a council, relevant body, or relevant qualified professional.
  • Residential premises constructed or substantially renovated while land is held must be ‘lawfully able to be occupied’, which occurs when the certificate of occupancy (or other local council approval) is received. 
  • The premises must also be leased, hired, or licensed or available for lease, hire or license.

3.    If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure on the land? 

  • Structures that have the sole purpose of increasing the utility of another structure are not considered independent. For example, whereas a house has an independent purpose that is not incidental to the purpose of any other structure, a shed or fencing in the context of residential land would not have a purpose independent of the residence.

By reference to a number of illustrative examples, TR 2023/3 also considers numerous other issues, including:tax update

  • What constitutes a cost of ‘holding’ land – e.g., interest and other ongoing borrowing costs, council rates, land tax, maintenance costs, etc.  In TR 2023/3, the Commissioner expresses his view that the costs of repairing, renovating, or constructing a structure on the land, or any interest or borrowing costs associated therewith, will not be in respect of ‘holding’ land.
  • Treatment of costs incurred after land is sold or business activity has ceased – the potential for costs to be deducted if the occasion thereof is found to be in whatever was productive of assessable income of an earlier period. 
  • Scope of the ‘carrying on a business’ exception – whether a business is being carried on is a question of fact determined by reference to the indicia of carrying on a business as set out in case law. Caution should be exercised in connection with Special Purpose Vehicles (SPV) that do not come within the ‘kind of entity’ exception. Additionally, it should be noted that section 26-102 will not apply to limit a deduction to the extent land is in use, or available for use, in carrying on a business. In the case of mixed use, or multiple titles, it may be necessary to apportion expenses on a reasonable basis. 
  • Treatment of costs not deductible due to the operation of section 26-102 – it is contemplated that such costs may form part of the third elements costs of owning the asset. However, according to subsection 100-45(7) of the ITAA 1997, third element cost can only be included in the cost base if there is a capital gain upon the sale of the CGT Asset. In the event of a capital loss, the third element cost will be excluded from the cost base, and it cannot be used to increase capital losses.


The appendix to TR 2023/3 sets out the Commissioner’s compliance approach with respect to the application of section 26-102.

Specifically, the Commissioner:

  • Acknowledges that there may be circumstances when newly-constructed properties are temporarily unavailable for lease, hire or license (e.g., where it is necessary for the owner to undertake minor maintenance or repairs). In such circumstances, the Commissioner will not seek to apply section 26-102, provided the general requirements under section 8-1 or another provision of the tax law are satisfied.
  • Recognising the practical difficulty of applying the exception to section 26-102 in relation to land leased to an entity carrying on a business (i.e., ascertaining whether the lessee is carrying on a business), enumerates the following considerations to which regard might be had:tax update about vacant land
    • whether the lessee has an active Australian Business Number;
    • whether the lessee his registered for Goods and Services Tax;
    • whether the lessee requires a tax invoice or receipt for lease payments;
    • the lessee’s stated intention regarding the use of the land – e.g., primary production is likely to indicate that the lessee is carrying on a business;
    • the amount of the lease payments – nominal or sub-commercial rates may indicate that the lessee is not in business;
    • the terms of a formal lease agreement may be an indicator that the lease is commercial in nature, and therefore more likely that the lessee is carrying on a business; and
    • where the lessee is themselves an entity excluded from the application of section 26-102.

Losses or outgoings will not be denied where a substantial or permanent structure that was affected by natural disaster or exceptional circumstances beyond the reasonable control of a taxpayer, for up to three years from the date of the event. However, substantiation in written records must be kept until 5 years after the losses or outgoings have been claimed. 

Some common scenarios are illustrated below 

Holding Vacant Land – Property Developers

Where property developers carry on a business, they are generally be excluded from section 26-102 even if the land is not actively used in the business. This is because land held by the developers for future developments would be considered “available for use”.  TR 2023/3 does not specifically mention cases related to property developers who are holding vacant land for several years with no plans on gaining or producing assessable income, however, it can be expected that the Australian Taxation Office may have a view and may seek to deny the deductions through the application of section 26-102.

Holding Vacant Land - Residential premises

Residential premises will not be considered as a substantial and permanent structure unless they can be lawfully occupied and are leased, hired or licensed.

However, TR 2023/3 states that short breaks between residential leases which leads to the property to be unavailable for lease, such as undertaking repairs and maintenance, would generally not result in denial of landholding expenses under the vacant land deduction rules.    

Should you wish to discuss how the Commissioner’s view on the application of section 26-102 might impact you or your business, please contact your local RSM representative.  

For more information

Should you wish to discuss how the Commissioner’s view on the application of section 26-102 might impact you or your business, please contact your local RSM representative.