New bill may hit vacant farm land holders

New bill may hit vacant farm land holders


Collateral damage is what many farming families and individuals could be if a proposed law, that is before the Senate, goes ahead.

 Common negative gearing scenarios that may fall outside the 'special rule'. Image: Courtesy of RSM Australia.

Common negative gearing scenarios that may fall outside the 'special rule'. Image: Courtesy of RSM Australia.

COLLATERAL damage is what many farming families and individuals could be if a proposed law, that is before the Senate, goes ahead.

With the intention to reduce land banking and encourage the development of houses or other uses, the bill will reduce the tax deductions given for having vacant land.

And a great deal of farmland falls under the bill's definition of 'vacant land'.

Under the new law, land will be considered vacant if there is no substantial and permanent building or other structure on the land which is in use, or available for use, with an independent purpose that is not incidental with another structure, such as a grain silo, shearing shed or commercial packing shed.

But not all vacant land has a structure such as these.

There are some exemptions to the law, however, RSM Australia senior manager Tracey Dunn said they ultimately provided little protection to farmers.

"It seems the bill takes a sledgehammer to deal with a walnut-sized problem," Ms Dunn said.

"I think whoever has written the legislation does not understand how farming families work or how they operate."

Ms Dunn said the legislation was intended to prevent people from obtaining vacant land who claim they will use it for an assessable purpose, but after a period of time, have shown no evidence of that happening and have claimed substantial deductions.

"I don't personally have an issue with denying deductions in those circumstances, but while this legislation isn't designed to adversely affect farmers, in its current form, it doesn't adequately cover all common leasing agreements within farming families," she said.

"If a family structure falls outside the special rule under the legislation, which is proposed to protect primary producers, there is a real risk they will be denied a tax deduction for any costs incurred in holding the land."

Take a common leasing scenario - a farmer or other land holder leasing vacant land for taxable purposes to an unrelated party, such as a neighbour, it's likely they would not be exempt from the bill.

As a result, the land holder could be denied a deduction for any expenses incurred from the lease income unless they can demonstrate they are carrying on a business of leasing land.

If the land is solely for earning a passive income, then the taxpayer will be denied a deduction for losses or outgoings incurred in that earning income.

"In many farming families, when the parents retire they lease the land to their adult children to run their own farming business, in which the parents are not directly involved - this scenario is likely to fall outside the special rule and therefore, the retired parents would be unable to claim a deduction," Ms Dunn said.

"Even more confusingly, this could lead to a situation where some taxpayers who lease land to a partnership for use in the farming business are eligible for a deduction while others are not, despite the land being used for the same purpose."

The special rule also provides an exemption for an affiliate, spouse or child who is younger than 18 years of the taxpayer holding the land, which Ms Dunn still said gave families little protection.

"I think there are not going to be too many circumstances where you have a child under the age of 18 that is carrying on a farm in their own right," she said.

"And trusts can't be affiliates and partnerships are unlikely to make the test of being an affiliate.

"There's not going to be too many farmers who are carrying on their farm businesses in their right name, they generally run the farm business through a discretionary trust.

"So it's very, very difficult for primary producers to actually meet the conditions under that special rule."

WA Property Lawyers director Eden Coad said if the bill goes through the Senate as drafted, thousands of landowners could be affected.

He said it could also have an impact on rural land values.

"There are a lot of retired farmers and investors who own rural real estate and who rely on lease income to maintain their investment, if all of a sudden expenses on holding that land are not able to be placed against rental income derived from it, then the viability of holding that land is reduced," Mr Coad said.

"Many landholders would consider selling their land and finding an alternate investment.

"This situation would have an effect on farmland property values."

He said the bill, if passed could likely prompt landowners to restructure their leases.

"If the legislation goes through, landlords will likely look at varying their lease documentation so that tenants are required to pay outgoings outright - outgoings such as land rates, insurance costs and possibly capital works expenses such as fencing being factored into rentals," he said.

"In WA, in relation to farmland leases, it has usually been the landlord's concern to pay rates, certain insurance for buildings and capital works.

"This might have to switch up so that these costs are being paid by tenants, with the tenants applying these to their own production costs,"

"But this leaves the interest that is being paid on loans used to purchase the land in the first place.

"It seems that these will almost being quarantined on the capital base, until the land is sold.

"However, many people are not looking to sell the land, they are holding it for their own future use."

Mr Coad said he thought land banking for future subdivision in rural areas would not be as common as it is in areas close to capital cities, as most people who purchased farmland do so to generate income from farming or leasing the land out, or sometimes both, and traditionally Australian farmland had been a relatively stable investment.

"There are a lot of farmers that retire, keep their farmland and lease it out to neighbouring farm businesses and hold it in the anticipation that one of their children will come and farm that land," he said.

"Furthermore, people invest in land because it is a different and often more attractive return than other investments currently available and with the possibly for a capital gain over the longer term.

"If all of a sudden farmland is no longer an attractive rental investment, then this could have an impact on farmland values.

"If this happened then the flow-on effect would be to farm business balance sheets and possibly, reduced lending capability for farmers.

"The legislation could also affect the incentive for landlords to continue upgrading certain capital infrastructure on lease land because, if landlords cannot claim capital improvement costs such as fencing or water improvement costs, as an income expense for the property, they will be less likely to improve certain infrastructure on farms."

The bill will have little to no impact on corporate farming businesses, so long as they are a company and not owned by an individual, but if the land is owned by a self-managed super fund, which Ms Dunn said there are few, it will be impacted.

When the Australian Labor Party (ALP) put negative gearing on the agenda as part of its 2019 Federal election campaign, many were concerned on the impact it would have on farmland owners but Ms Dunn said this bill would be more detrimental.

"Under the ALP's former negative gearing proposal, land used in primary production would not have been impacted and taxpayers would be able to claim a deduction for losses and outgoings, however in respect of certain property, the deduction would have been limited to the extent of the assessable income earned," she said.

"Under the Federal government's proposal to deny deductions incurred in relation to vacant land, primary producers and taxpayers who use land for a taxable purpose but are not carrying on a business will be a special class of taxpayer who is assessed on income but denied any deduction for losses or outgoings incurred in earning that income.

"This is a very inequitable and unfair outcome."

The law will apply to any losses or outgoings on or after July 1, 2019, regardless of when the land was purchased.

Ms Dunn urged those land owners who think they could be affected by this proposed law to contact their local senator and express their concerns and to get in touch with their tax and accounting adviser.

WA senator Slade Brockman, chairman of the Senate Economics Legislation Committee, said it had made recommendations on the bill to prevent farmers being impacted.

"The government considered those recommendations and I understand is proposing to amend Schedule 3 (the relevant section of the bill) to provide clarity on the policy intent of the legislation," Mr Brockman said.

"The Minister for Housing and Assistant Treasurer Michael Sukkar has publicly stated that this integrity measure will not affect taxpayers genuinely using land to generate income, including farmers, or taxpayers whose property is not available for use as a result of unforeseen and uncontrollable events.

"I have sought and received assurances that farmers will be fully protected from any unintended consequences of the bill."


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