Chapter 3 – Treatment of periods of vacancy

3.1 The second issue is the correct tax treatment of holding costs relating to land that is not actively used and is taxable on sale. If deductions are denied (wholly or in part) as a result of private use, it is necessary to determine whether unused or vacant land should be treated as being used privately, or for income earning purposes.

3.2 The treatment of vacant or unused time as either private or income-earning could depend on the other uses of the land during the period of ownership. This would mean that:

  • Where land is otherwise actively used either privately or for income-earning purposes, any vacant or unused days could be treated similarly. For example, where a person has a rental property that is vacant for a couple of months between tenants, that vacant time would still be treated as income-earning use. If a person has a bach that is wholly used for private purposes, unused time would be treated as private use.
  • Where land is used for both income-earning and private purposes and there are more than 62 days of vacant or unused time, the current “mixed-use asset rules” could continue to apply. These rules apportion vacant days based on the proportion of actual private and income-earning days (for example, if a bach is used privately for 20 days in a year and is rented through Airbnb for 20 days in a year and is otherwise vacant, fifty percent of the vacant days are treated as private days and fifty percent of the days are treated as income earning days).

3.3 Where land is wholly vacant or unused, the use could be considered income earning if:

  • it is held for a business of dealing in, developing, or building on land;
  • it is held for another income-earning purpose (for example, land purchased to expand a current business onto, or to erect a rental property); or
  • the taxpayer otherwise informs the Commissioner at the time of purchase that the land was acquired solely with an intention of resale for profit.

3.4 In all other situations where land is wholly vacant or unused the use would be considered private.

3.5 This approach to the treatment of periods of vacancy ensures that legitimate businesses can still claim deductions for holding costs for periods of vacancy, while also ensuring that private expenditure is kept out of the base.

3.6 In contrast, treating all periods of vacancy as either wholly private or wholly income-earning use would either deny deductions for legitimate business expenditure, or allow deductions for private expenditure.