ATO Interpretative Decision
ATO ID 2003/150
General
Trading stock - external costsFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are costs incurred by the taxpayer in order to gain development approval for residential units, part of the cost of trading stock under Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The costs incurred by the taxpayer in order to gain development approval for residential units are part of the cost of trading stock under Division 70 of the ITAA 1997.
Facts
The taxpayer is in the business of property development.
The taxpayer acquired an area for the purpose of erecting residential units.
In order to gain the necessary development approval the taxpayer agreed to redevelop existing facilities in an adjacent area. These costs were not part of the cost of acquisition of the area for development but were a cost incurred in gaining the development approval.
Reasons for Decision
Division 70 of the ITAA 1997 deals with tax accounting for trading stock. Section 70-10 of the ITAA 1997 defines 'trading stock' to mean 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and livestock'.
The area acquired for development into residential units is analogous to broadacre land and forms part of the taxpayer's trading stock (Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452). Individual articles of trading stock can be valued when they become identifiable (for example, when the Strata Plan is registered, see Barina Corporation Limited v. FC of T (1985) 4 NSWLR 96; 85 ATC 4847; (1985) 17 ATR 134).
In the decision of Federal Commissioner of Taxation v. Kurts Development Ltd (1998) 86 FCR 337; (1998) 39 ATR 493; 98 ATC 4877 (Kurts Development), infrastructure and external costs were allocated to the value of trading stock. In discussing the allocation of external costs, the court in Kurts Development used a 'but for' test. In that case the question was whether the external costs were properly characterised as part of the cost price of the individual subdivided lots. They were all expenses which had to be incurred in order to create the individual subdivided lots and, but for that expenditure, those lots would not have been created. For that reason the external costs were also part of the cost price of the individual lots.
All of the costs incurred by the taxpayer in acquiring their trading stock are to be regarded as part of the cost price of that trading stock. This includes both the direct costs of the area acquired and the costs of the development of that area. In the taxpayer's circumstances these development costs also include the cost of gaining the development approval. As a condition of gaining that development approval the taxpayer incurred costs in redeveloping the adjacent area. These costs form part of the development costs and are therefore part of the cost of the trading stock.
Accordingly, the costs of obtaining development approval by the taxpayer are part of the cost of the taxpayer's trading stock for the purposes of Division 70 of the ITAA 1997.
Date of decision: 4 March 2003Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1997
Division 70
section 70-10
Case References:
Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq)
(1978) 138 CLR 210
78 ATC 4104
(1978) 8 ATR 452
(1985) 4 NSWLR 96
85 ATC 4847 Federal Commissioner of Taxation v. Kurts Development Ltd
(1998) 86 FCR 337
(1998) 39 ATR 493
98 ATC 4877
Keywords
Trading stock
ISSN: 1445-2782
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