From 1 July 2019, section 26-102 ITAA 1997 applies and can reject the deduction for losses or outgoings relating to holding land if there is no substantial and permanent structure available for usage or in usage on the land. Some exceptions apply to the operation of these rules, such as where the land is used to run a business by the taxpayer or some other parties or if the taxpayer is a type of entity.
These provisions can prevent deductions from being claimed for holding costs if residential premises have been substantially renovated while the taxpayer has held the land unless:
- The premises can be occupied lawfully
- The premises are used to earn rental income or are available for rent
In August 2021, the draft ruling was released which looks at the application of these provisions. The ruling identifies some of the key problems that can arise when applying these rules. According to the ATO, you must distinguish between expenses related to holding land and expenses related to constructing a building on the land, then section 26-102 shouldn’t apply to these expenses.
The ruling clarifies that the ATO won’t focus on enforcing subsection 26-102(4) in cases where residential premises aren’t available for short periods due to reasons other than exceptional circumstances or natural disasters. For instance, brief periods for minor maintenance won’t typically fall under this rule, but there’s no specific duration outlined for what qualifies as “short or brief.”
It is worth noting that there are some exceptions to the new rules, provided that certain conditions are met. These conditions include the following:
- The land is leased, hired, or licensed to another entity at arm’s length.
- The land is being used or is available for use in carrying out a business.
- The land does not contain any residential premises.
- No residential premises are being constructed on the land.
However, it may be challenging for the property owner to determine whether the tenant is carrying out a business at arm’s length. The Australian Taxation Office (ATO) suggests that the owner should make a reasonable assessment of the tenant’s use of the land when leasing it to another entity. The following factors should be considered:
- Whether the lessee has an active Australian Business Number (ABN).
- Whether the lessee is registered for Goods and Services Tax (GST).
- Whether the lessee needs a tax invoice for lease payments.
- The lessee’s stated intention related to the use of the land. Using the land for primary production is likely to indicate that the lessee is carrying out a business.
- The amount of the lease payments. Sub-commercial or nominal 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, and therefore more likely that the lessee is carrying out a business.
- Where the lessee is an entity of the type that is referenced in subsection 26-102(5), this may state that the lessee is in business.