SMSFs ‘unfairly targeted’ in vacant land tax changes
With the proposed changes to tax deductions for vacant land intended to apply from July this year, a technical expert has urged the government to rectify some of the issues with the draft legislation that negatively impact SMSFs.
Last year in October, Treasury released draft legislation intended to restrict some of the deductions allowed for expenses associated with holding vacant land, followed by a brief consultation period.
The government first announced it would be making changes to the tax deductions for vacant land in the 2018-19 budget, following concerns that deductions were being improperly claimed for holding vacant land where the land is not genuinely held for the purpose of earning assessable income.
It is yet to introduce the bill for the legislation into Parliament, however.
Speaking to SMSF Adviser, Insyt chief executive Darren Wynen explained vacant land can be any land without a substantial structure or permanent structure.
“It could be farming land or it could also be part of a title where you’ve got a factory on one part and you’ve got factory land on the other part,” said Mr Wynen.
Mr Wynen said certain parts of the draft legislation “unfairly targets SMSFs” which he hopes will be rectified by the government before it introduces it into Parliament.
“What the government has said effectively, is that if vacant land is not being used in one of two ways, either as a business that is being conducted or by certain excluded entities, then that claim will be knocked out. If we look at SMSFs, an SMSF doesn't traditionally carry on a business,” he warned.
“The second [issue] is that the deduction might be okay if it used by an associated entity but due to the way laws are currently drafted, an SMSF is not regarded as a connected entity or an affiliate because its basically not considered to be a related party for the purposes of these measures.”
Mr Wynen said this means that in genuine situations where farming land is leased to a related party, for example, the SMSF won’t be considered to be a related party and therefore won’t have the ability to claim interest or other holding costs.
“The SMSF might have a limited recourse borrowing arrangement to buy that land and it may be genuinely used and the SMSF will still be unable to claim. It seems that SMSFs are being unfairly targeted in this way,” he said.
Previously commenting on the draft legislation, SuperConcepts executive manager for SMSF technical and private wealth Graeme Colley said that certain aspects of the draft legislation could be clearer, including the definition of what vacant land is.
“They do use examples where there are no buildings on the land and things like that, but what is vacant land in a business?” said Mr Colley.
“For example, you might have a factory where outside that factory you’ve got areas which are merely lawns or paths where people would enter. Or you might have a carpark that looks like a vacant block of land but people can park their cars on it, so does the parking of a car on a block of land change its nature to being vacant to being used as part of the business? How do you apportion that if it’s only being occasionally used for those purposes?”
He also noted that deductions don’t apply during building periods where local councils or even state government won’t permit land to be built on.
“An example of that is with contaminated land. If you were going to redevelop a petrol station, for example, that needs to be left vacant, so if an individual owned a petrol station or the land on which a petrol station was and there was some leaching into the soil of petroleum or whatever it might be, and you’re not allowed to start building on that until that period is over, that’s not included,” he explained.
“I think that might be a little tough because part of the process of developing that land is to leave it undeveloped for some time, and I wonder whether there should be a deduction to cover types of periods in the lead up, because you would have applied to your development authority and all those sorts of things.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.