ATO Interpretative Decision
ATO ID 2004/129 (Withdrawn)
Income Tax
Land that becomes trading stock - time it becomes trading stockFOI status: may be released
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This ATO ID is withdrawn and is replaced by ATO ID 2004/532.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
When does land that was originally acquired and used for farming purposes and later ventured into a business of subdivision, development and sale, become trading stock of the taxpayer for the purposes of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Land that was originally acquired and used for farming purposes and later ventured into a business of subdivision, development and sale, becomes trading stock of the taxpayer for the purposes of Division 70 of the ITAA 1997 when it is in a subdivisible state.
Facts
The taxpayer originally acquired land for farming purposes. The taxpayer later ventured the land into a business of subdivision, development and sale. The taxpayer intends to sell the land in subdivided lots. At the end of the current year, the land is in a subdivisible state but has not yet been subdivided into separate lots ready for sale. The proceeds from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997.
Reasons for Decision
Under section 70-10 of the ITAA 1997 trading stock is defined to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business.
The question of when an area of land that was not formally subdivided could be an article of trading stock was considered by the Supreme Court of New South Wales in Barina Corporation Limited v. Federal Commissioner of Taxation (1985) 4 NSWLR 96; 85 ATC 4847; (1985) 17 ATR 134. In that case, the Supreme Court stated that in the context of land proposed to be sold by subdivision, the land may be regarded as an article of trading stock only where the block of land is marketable. Where the absence of marketability is due to the fact that the land has not yet been converted to a subdivisible state, then the block of land not yet formally subdivided cannot be an article of trading stock.
It follows from the statements above that it is possible for land that was not formally subdivided to be trading stock of a business of subdivision, development and sale, when the land is in a subdivisible state. The precise point as to when a block of land is in a subdivisible state depends on the circumstances of the particular taxpayer and may vary from case to case. In certain cases, the point when a block of land is in a subdivisible state may coincide with the point when the land is ventured into the business of the taxpayer, being a business of subdivision, development and sale. In other cases, it may be possible that the point when land is ventured into a business of subdivision, development and sale and the point when land is in a subdivisible state (trading stock) may be two different points in time.
As the proceeds from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997, the taxpayer is regarded as being in the business of subdivision, development and sale of land. In this case, the point when the taxpayer's land will be treated as trading stock, and therefore in a subdivisible state, will coincide with when the land is ventured into the business of subdivision, development and sale.
Date of decision: 17 December 2003Year of income: Year ended 30 June 2003 Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Section 6-5
Section 70-10
Section 70-30
Case References:
Barina Corporation Limited v. Federal Commissioner of Taxation
(1985) 4 NSWLR 96
85 ATC 4847
(1985) 17 ATR 134
ATO ID 2004/128
Keywords
Business income
Carrying on a business
Construction & real estate
Dealings & transactions
Income
Ordinary course of business
Profit making purpose
Real estate as trading stock
ISSN: 1445-2782
| Date: | Version: | |
| 17 December 2003 | Original statement | |
| You are here | 2 July 2004 | Archived |