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ineligible for inclusion in element 3 of cost base, and

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ineligible for 'black hole' business expenditure relief under paragraph 40-880(1)(b).

Examples include:

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vacant land assets acquired on or before 20 August 1991

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vacant land where a capital loss is incurred (per subsection 110-55(3))

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pre-CGT vacant land (as cost base inclusion will be of no benefit), and

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vacant land that is trading stock (as cost base inclusion is inapplicable).

Black hole expenditure deduction under section 40-880 is only available to business capital expenditure. We invite taxpayers to engage with us to discuss their personal circumstances.

The effect of these provisions is likely to result in potentially substantial section 26-102 non-deductible holding costs associated with vacant land (which may be genuine trading stock of an active business).

We appreciate the ATO's only potential solution to the above issues might be a concessional 'substantial and permanent structure' interpretation to reduce instances of land being vacant. However, this may not assist residential property developers due to subsection 26--102(4).

Developers who hold their land in trusts will have to meet the tests of being in business or being a connected entity (noting discretionary trusts cannot be affiliates), per subsection 26-102(2).

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A doctor purchases an established home to live in, but with 50% usage as a surgery (business), this would not be vacant land. However, if the same doctor constructed or substantially renovated a home to use as a combined home and business the land could be considered vacant as it is not available for lease, hire or purchase.

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A mining entity caught by section 26-102 may rely on a number of mining dongas used as worker accommodation to ensure the land is not considered vacant. Once again, if the land was purchased with dongas on site it would not be captured under subsection 26-102(4), while if the dongas were constructed by the entity they would have to meet the condition of being leased, hired or licensed or available for same.

It is suggested that many landholders (including those with residential premises constructed or substantially renovated before 1 July 2019) and their professional advisers may be unaware of this issue and how to practically manage it to ensure holding costs remain deductible.

The draft Ruling only discusses the meaning of 'in use or available for use' in the context of residential premises. It is suggested the final Ruling should also address the meaning of being 'available for use' in the context of commercial premises.

The distinction between established properties and newly-constructed or substantially renovated properties is a product of the function of subsection 26-102(4).

We have also updated paragraph 20 of the final Ruling to include a footnote that references that:

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'residential premises' is defined in section 195-1 of A New Tax System (Goods and Services Tax) Act 1999, and

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for further guidance refer to Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises.

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an apartment, house or townhouse

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business premises using a building with similar characteristics to a house or townhouse (for example, a law firm located in a former home, even if zoned commercial)

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hotels, holiday villages, hostels and similar transportable/demountable residential premises

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mixed-use structures (for example, central business district office building with apartments on top floor)

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hospitals, nursing homes and similar

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premises without a residential character but being used as a residence (for example, an employee living in an office), and

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floating homes (unless able to self-propel).

It is highly likely that many landholders and their professional advisers are unaware of the consequences of this broad definition. Extensive and clear taxpayer education to alert affected land holders to the non-deduction risk and how it should be addressed is likely to be required.

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'residential premises' is defined in section 195-1 of A New Tax System (Goods and Services Tax) Act 1999, and

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for further guidance refer to GSTR 2012/5 Goods and services tax: residential premises.

Whether something is a substantial or permanent structure will be dependent on the facts and circumstances and the context of the land. The land may also be excluded from the operation of section 26-102 depending on whether the land is being used in business or primary production. While paragraph 3.22 of the EM provides that structures that exist to support the use or functioning of another structure, such as pipes or powerlines, will not satisfy this requirement, we consider that irrigation piping or mining infrastructure may be substantial structures depending on the context of the land.

The structure in Example 1 is an 'established house', meaning that subsection 26-102(4) does not apply. In this example, the primary production context does not affect the outcome.

If a suburban residential property and an associated swimming pool or tennis court were on separate titles, would the ATO be likely to treat the pool or tennis court as a substantial and permanent structure? Would the outcome be different if there was a pool house or tennis court shelter on the title?

Clearer advice and examples will assist taxpayers.

If the 100 hectares in Example 1 of the draft Ruling were held under multiple titles, and there were no other permanent and substantial structures, would it only be the title containing the manager's residence that would not be considered vacant land?

Paragraphs 45 to 48 of the final Ruling confirm that the loss or outgoing will determine the area of land that is relevant for the purposes of section 26-102. This approach acknowledges that in most cases, holding costs will relate to land covered by a single property title, in which case the relevant land will be the land under that title. However, some holding costs may relate to only part of the land under a property title while others may relate to land covered by multiple titles.

It is requested that the final Ruling confirm the same analysis would apply to interest and borrowing expenses for loans obtained for:

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substantial renovations to a substantial and permanent structure, or

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repairs or improvements to a substantial and permanent structure.

In the context of section 26-102, we do not consider the costs of repairing, renovating or constructing a structure on the land, or any interest or borrowing costs (to the extent they are associated with repairs, renovation or construction), to be a loss or outgoing related to holding land.

Also, further explanation of what constitutes 'minor' is required, or removal of the word 'minor' all together.

The key phrase of the compliance approach is 'short periods of time when residential premises are unavailable for lease, hire or licence'. The term 'minor maintenance and repairs' is only used in an example of what may necessitate the short period of unavailability, it is not intended as a criterion for the compliance approach.

It is unlikely that more substantial improvements would allow for the compliance approach as the period of unavailability is unlikely to be 'short'.

Provide an example of a taxpayer who sells a former rental property untenanted and therefore any ongoing interest expense is not deductible due to the vacant land provisions meaning it was not deductible immediately before the sale of the property.

Paragraphs 45 to 48 of the final Ruling confirm that the loss or outgoing will determine the area of land that is relevant for the purposes of section 26-102.

The final Ruling makes it clear that whether the activities on the land amount to 'carrying on a business' is a question of fact determined by reference to the indicia of carrying on a business as set out in the case law.

The SPV may be a discretionary trust and hence subject to section 26-102. Considered in isolation, land held by the SPV may be deemed not to be in use, or available for use, in carrying on a business.

However, following Grollo Nominees Pty Ltd & Ors v The Commr of Taxation of the Cth of Australia [1997] FCA 659 the broader activities of the group should be considered in determining if the SPV is carrying on a business.

The draft Ruling should be amended to clarify that the business of an SPV trust must have regard to the broader group.

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whether the lessee is involved in repairs and maintenance of the property

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how lease payments are determined, and

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whether the lessee has constructed or restored substantial and permanent structures.

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exemption does not apply in circumstances that do not affect the structure, for example, financial hardship that causes delays to renovations, and

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Commissioner's discretion relates only to the timing of the exception, not the circumstances allowing the exception.

Note that the policy and legislation around shortfall interest charges and tax shortfall penalties already requires the Commissioner to consider the circumstances leading to the shortfall.

However, footnote 1 of the final Ruling has been updated to note that a lessee may also incur costs relating to holding land.

We do not consider it appropriate to expand this approach for structures more generally. The types of structures that exist on land are infinitely varied as are the circumstances in which they become unavailable for use.

It is noted that the EM appears to have used a different test in paragraphs 3.10 and 3.29 where it refers carrying on a business 'by certain entities related to the taxpayer' (emphasis added).

Given the ambiguity further guidance by the ATO would be appreciated.

We note the final Ruling has been updated at paragraph 40 to acknowledge that particular entities are excluded from the application of the vacant land measures per subsection 26-102(5).

In addition, paragraph 37 of the final Ruling has been updated to note that whether a business is being carried on by an entity is a question of fact determined by reference to the indicia of carrying on a business as set out in case law. Further, footnote 20 (at paragraph 37 of the final Ruling):

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notes that guidance relevant to identifying whether an individual is carrying on a business is contained in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production

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refers also to Self-Managed Superannuation Funds Ruling SMSFR 2009/1 Self-Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.

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the taxpayer or a related entity (within the meaning of subsection 26-102(2)) is carrying on a business of primary production

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the land is leased to another entity

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it does not contain residential premises, and

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residential premises are not being constructed.