Developers unaffected by tax on land banking in the 2018 federal budget

Developers unaffected by tax on land banking in the 2018 federal budget by Global Capital Commercial

As part of the 2018 federal budget, the federal government announced a new series of features that they have labelled as ‘tax integrity’ initiatives. These initiatives have turned attention on land-banking, with many commercial property developers, residential property developers and private lenders initially concerned about the implications.

For those who aren’t familiar, land-banking is the act of buying undeveloped blocks of lands, and is a popular move in the current real estate market, because it allows blocks to be sold at a much higher rate when approved for development.

So are these changes going to affect your business?

What do the “tax integrity” initiatives really mean?

Developers were alarmed by the call to abolish tax incentives that encourage land banking of commercial and residential properties, indicating that the costs to hold land would inevitably rise too. Private lenders are also uncertain of how they will be affected, with less land-banking leading to less borrowing capacity. However, these concerns have been mostly assuaged by Ken Morrison, chief executive of the Property Council of Australia. Morrison has confirmed that “So long as there is an operating business being undertaken on the land then this measure won’t apply… In the vast majority of cases for development companies that will be the case, so this is not a big bogeyman for the industry that some have speculated.”

Why have the “tax integrity” initiatives been put in place?

It seems that the measure has been predominantly put in place to reduce incidences where deductions are being claimed for things like interest and the costs associated with holding vacant land when the land is not legitimately held for earning income that is tax assessable.

The new tax integrity initiatives are also expected to raise $50 million per year for the government.

What next?

These new initiatives are expected to be in effect from July 1 2019. While the majority of commercial property and residential developers are expecting to be unscathed, there are still some concerns in the industry. Morrison states that further information about the legislation should be released shortly in support of these changes within the 2018 federal budget. He is eager to ensure that the government is not “trying to target legitimate development companies who need to hold land for the future.”

The federal government appears to continue to support the business of developers, recognising that development projects can be drawn out and extensive. Those who operate legitimately will continue to be able to benefit from tax exceptions and will be able to make claims on their business operations. However, the new initiatives will crack down on those who hold land and make claims on developments that don’t come to fruition and ultimately cost taxpayer dollars.