Can You Claim Deductions for Vacant Land?

If you own or are planning to buy vacant land in Australia, it’s vital to understand how recent tax rules affect your ability to claim deductions. Since 1 July 2019, the Australian Tax Office (ATO) has tightened rules around deductions for holding vacant land. For many, this means no longer being able to offset costs like interest, council rates, or land tax against income—unless specific exceptions apply.

Let’s break down the key points to help you work out whether your land qualifies for deductions.

The General Rule: No Deductions for Holding Vacant Land

As of 1 July 2019, most individuals can no longer claim a tax deduction for the costs of holding vacant land. This includes expenses such as:

• Interest on loans used to purchase the land
• Council rates
• Land taxes
• General maintenance

If you’re holding land purely for future development or personal investment without any current income-producing use, deductions for those holding costs are off the table.

Who Can Still Claim Deductions?

There are important exceptions. You can still claim deductions if:

1. You are a specific type of entity, such as:

   • A company (corporate tax entity)
   • A complying super fund (excluding SMSFs)
   • A managed investment trust or public unit trust

2. The land is used in a business, including:

   • Farming
   • A business run by you, your spouse, children under 18, or a connected entity
   • Leased at arm’s length to a third party for business purposes (not residential)

3. You’re a primary producer, or leasing the land to a related entity for primary production

4. Exceptional circumstances apply, such as:

   • Natural disasters
   • Fires
   • Structural defects rendering a property uninhabitable

You must apply for an extension if these exceptional circumstances continue beyond three years.

What Counts as “Vacant Land”?

Vacant land isn’t just a block without a house. It’s defined by what’s on the land and what it’s used for. Land is considered vacant if:

• It has no substantial and permanent structure
• The only structure is residential premises under construction or substantial renovation and:
  • Not lawfully able to be occupied, or
  • Not yet rented or available for rent

Examples of substantial and permanent structures include:

• A woolshed or grain silo
• A homestead on a farming property
• A commercial parking garage

But not:

• A garden shed or garage
• Pipes, fences, or landscaping
• A tiny house on wheels (unless permanently fixed)

Deductions: What You Can and Can’t Claim

Not deductible:

• Costs for holding truly vacant land
• Interest on loans used to purchase vacant land
• Maintenance expenses before the property is rented

Still deductible:

• Costs related to land that is producing income (e.g. actively farmed or leased to a business)
• Interest for loans used in construction after the property becomes income-producing
• Costs during substantial renovations—but only after the home is lawfully occupiable and available for rent

Apportioning Costs

If your land goes from vacant to income-producing during the year, you’ll need to apportion expenses. For example:

• If your council rates cover a full year but the property was only income-producing from October, you can only claim from that point onward.
• If garden maintenance was paid upfront for a full year, but the land was vacant for part of that time, only a portion is deductible.

Special Rule for Primary Producers

Land used in a primary production business (like cropping or grazing) is not considered vacant—even if there’s no building—provided there are substantial structures like fencing or silos, or it’s leased to someone running a related farming business.

What If Exceptional Circumstances Apply?

If your property was rendered vacant by an extraordinary event like a bushfire or major building defect, you may still claim holding costs for up to 3 years. You can apply for an extension if delays in rebuilding were outside your control (e.g. builder liquidation, council delays).

You’ll need to:

• Keep detailed records
• Apply to the ATO for a private binding ruling
• Show steps taken to rebuild

Capital Gains Tax (CGT) Implications

If you’re unable to claim deductions for holding vacant land, these costs may still be used to reduce your capital gain when you eventually sell the property. Eligible expenses can be added to your asset’s cost base, helping to lower your CGT liability.

Final Thoughts

The ATO’s rules on vacant land deductions are stricter, but there are still pathways to claim if your land is used for income-producing activities or meets one of the outlined exceptions. Before purchasing or developing land, consider seeking advice from a registered tax agent or accountant to ensure you’re not left out of pocket come tax time.