Edited version of your written advice

Authorisation Number: 1012887360949

Date of advice: 6 October 2015

Ruling

Subject: Property Development - Classification of Property as Trading Stock

Question

Is the property held by the Trustee for the Trust (the Taxpayer) trading stock within the meaning of 'trading stock' provided in section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

The property held by the Taxpayer is trading stock within the meaning of 'trading stock' provided in section 70-10 of the ITAA 1997.

This ruling applies for the following periods:

1 July 20XX to 30 June 2014

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

According to the Trust Deed for the Trust, the objects of the Trust include the application and investment of monies in its Trust Fund across a wide range of investment vehicles that the Trustee, in its absolute discretion, sees fit. Such investment includes the development and sale of, real property.

The Taxpayer purchased a property (the Property).

The Taxpayer acquired the Property for the purpose of profit-making by sale.

In particular, the Taxpayer purchased the Property to enter into a construction and development agreement (Development Agreement) with a related entity, which would then undertake a large-scale residential development in respect of the Property (the Development). The Development will include the construction of a number of units (and associated works).

The related entity is the Developer. The Developer has carried out a number of previous developments.

The Taxpayer has not previously carried out any property developments and does not intend to carry on any other property developments once the Development has been finalised.

The Taxpayer will pay the Developer a substantial development fee.

Construction has commenced and it is anticipated that sales will be generated in the future. All construction expenditure is incurred by the Developer.

The Taxpayer treated the Property as 'trading stock' in its income tax return.

On the basis that the Property was trading stock, the Taxpayer claimed an amount of Direct Sales Costs as a deduction.

Apart from entering into the Development Agreement, making the Property available as security for the Developer's finance facility and engaging the selling agents, the Taxpayer does not employ or engage any employees or contractors or undertake any active role in carrying on the Development. All of the activities relating to the Development are carried on by the employees, consultants and agents of the Developer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Trading Stock

Subsection 70-10(1) of the ITAA 1997 states that 'trading stock' includes:

anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

With specific regard to whether land is treated as 'trading stock' for property development purposes, the Commissioner states in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124), that land will be treated as trading stock if both of the following requirements are present:

1. the land is held for the purpose of resale, and

2. a business activity which involves dealing in the land has commenced.

Pursuant to TD 92/124, there need not be land acquisitions on a repetitive basis - a single acquisition for development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

Have the elements of subsection 70-10(1) of the ITAA 1997 been satisfied for the Property to be treated as 'trading stock'?

Property Held for the Purpose of Sale

Based on the facts provided, the Taxpayer acquired and held the Property in order to build units for sale upon completion. This is supported by both the Trust Deed for the Trust and the Development Agreement that the Taxpayer entered into with the Developer.

Therefore, the first requirement in order for the Property to be treated as trading stock as per subsection 70-10(1) of the ITAA 1997 is satisfied.

Ordinary Course of a Business

'Business', as referred to in the definition of 'trading stock' at subsection 70-10(1) of the ITAA 1997, is defined in section 995-1 of the ITAA 1997 to include:

any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

A 'business activity' for the purposes of TD 92/124, as introduced above, is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

It is considered that the Taxpayer is carrying on a business of land/property development - and is thus carrying on a 'business activity' pursuant to TD 92/124 - on the basis of the following factors:

1. The large-scale residential development in respect of the Property (the Development) has a significant commercial purpose, particularly in terms of the Taxpayer's profit-making motive.

2. The Taxpayer has more than just an intention to engage in business.

3. There is a prospect of the Taxpayer making a profit after completion of the Development.

4. The size and scale of the Development is significant, with a large volume of units being developed for sale.

5. Marketing activities have been undertaken and significant associated costs incurred in respect of the Development.

6. The Development is carried on in a business-like manner on the basis of the Development Agreement; the Developer engaged to undertake the development is qualified/experienced; construction plans have been developed; planning permits obtained; a Schedule of Costs and a Schedule of Progress Payments has been prepared etc.

Despite the fact that the Taxpayer does not intend to carry on any other property developments once the Development has been finalised, there is no requirement that land be acquired on a repetitive basis in order to be treated as trading stock. As mentioned above, pursuant to TD 92/124, the Taxpayer's single acquisition of its Property for development and sale (as part of its land/property development business) would lead to the Property being treated as trading stock.

Therefore, the second requirement in order for the Property to be treated as trading stock as per subsection 70-10(1) of the ITAA 1997 is satisfied.

Conclusion

The two elements of the definition of 'trading stock' in subsection 70-10(1) of the ITAA 1997, as well as the two conditions in TD 92/124 to be met in order for the Property to be treated as trading stock, are satisfied. That is:

1. The Taxpayer held the Property to develop units on that property for sale upon completion, and

2. The Taxpayer is carrying on a business - the business of land/property development - such that a 'business activity' in dealing with the Property (i.e. development operations designed to lead to the sale of units) is underway.

Therefore, the Property held by the Taxpayer is trading stock within the definition of 'trading stock' provided in section 70-10 of the ITAA 1997.

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