“From 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land,” the ATO said.

“The draft ruling explains the commissioner’s view of the application and the exclusions of section 26-102 of the Income Tax Assessment Act 1997. This draft ruling also sets out practical compliance approaches for some situations in Appendix 1 of the ruling.”

The rules in s 26-102 of ITAA 1997 operate from 1 July 2019 to deny deductions for expenses related to holding vacant land, including land on which a residential rental property is either under construction or being substantially renovated, or which has a completed residential property that is not available for rent, regardless of when the land was purchased.

The rules generally apply to individuals and SMSFs with companies and institutional investors, such as other superannuation funds made specifically exempt from the rules. 

There are key exclusions which include expenses incurred in connection with carrying on a business such as property development or a primary production business. There are also exemptions for structures affected by natural disasters or other exceptional circumstances.

The draft ruling also illustrates with examples the various scenarios in which these exclusions operate and the scope of the conditions that a rental property must be available for rent, and capable of being lawfully occupied, to not be regarded as a vacant property.

The ruling also states in its compliance approach that short breaks between residential leases, such as undertaking repairs and maintenance, during which a property is unavailable for lease, would generally not result in landholding expenses to be denied under the vacant land deduction rules.

“We recognise that there will naturally be short periods of time when residential premises are unavailable for lease, hire or licence for reasons other than an exceptional circumstance or natural disaster. For example, it would be expected that between tenancies, there will be a brief period when the premises cannot practically be made available for lease because it is necessary for the owner to undertake minor maintenance and repairs,” the ATO said.

“These circumstances are outside the contemplation of subsection 26-102(4) and we will not apply resources to review compliance with subsection 26-102(4) provided that you continue to meet the requirements for deductibility under section 8-1 or another provision of the tax law.”

The ATO also noted that borrowing costs (including interest) related to construction loans to build a residential property on vacant land do not fall within the ambit of borrowing costs related to holding vacant land. As such, the rules would not deny interest deductions to that extent.

The last day for submitting comments on the draft ruling is 17 September 2021.