Edited version of private advice

Authorisation Number: 1052381474802

Date of advice: 3 April 2025

Ruling

Subject: Disposal of Trading Stock

Question 1

Will subsection 70-110(1) of the Income Tax Assessment Act 1997 apply to the Property held by Entity A during the year ended 30 June 20xx?

Answer 1

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A was established as the vehicle for the acquisition and commercial development of the Property.

Entity A accounted for the Property as trading stock in its financial reports.

Entity A established project milestones, conducted feasibility studies, signed agreements to hire staff, resulting in significant project costs.

Entity A's intention with respect to the Property changed at some point between 1 July 20xx and 30 June 20xx, such that it was no longer pursuing property development and ceased to hold the Property as trading stock.

Entity A continued to hold the Property, undertaking various steps with a view to leasing the Property.

Entity A did not include the Property as trading stock in its financials post 30 June 20xx.

The Property was leased to unrelated parties throughout its ownership by Entity A.

Entity A entered into a contract to sell the Property sometime after 30 June 20xx as leasing of the Property was not the Entity A's long term hold strategy or initial intention.

Relevant legislative provisions

Income tax assessment Act 1997 section 6-5

Income tax assessment Act 1997 division 70

Income tax assessment Act 1997 section 70-10

Income tax assessment Act 1997 section 70-110

Reasons for decision

Division 70 of the Income Tax Assessment Act 1997 deals with trading stock. This Division deals with amounts you can deduct, and amounts included in your assessable income, because of these situations:

              i.                you acquire an item of trading stock;

             ii.                you carry on a business and hold trading stock at the start or the end of the income year;

            iii.                you dispose of an item of trading stock outside the ordinary course of business, or it ceases to be trading stock in certain other circumstances.

Section 70-10 provides 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; and live stock.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124) confirms that it is the Commissioner's view that land will be trading stock for income tax purposes if:

•                     it is held for the purpose of resale; and

•                     a business activity which involves dealing in land has commenced.

In the current case,

•                     At the time of purchase of the Property, it was the intention of the Entity A to undertake the development of the Property.

•                     Entity A initiated the development process by negotiating agreements, hiring staff, creating and implementing strategies, preparing feasibility reports, project millstone schedules, appointing design consultants, builders, marketing coordinators, securing permits and settling and reporting phases to assure compliance.

•                     Entity A incurred development cost associated with the project development with major items include acquisition fees, architect, town planner, engineering, strata consultants, and development fees.

•                     Entity A accounted for the Property as trading stock from the time it was purchased in 20xx until end of 20xx.

The applicant has stated that the Property was no longer held as trading stock sometime during the year ending 30 June 20xx, as the property development activities were abandoned but the applicant continued to own the Property. As a result, it is necessary to consider whether section 70-110 of the ITAA 1997 has application.

Subsection 70-110(1) of the ITAA 1997 states:

If you stop holding an item as trading stock, but still own it, you are treated as if:

(a)           just before it stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost; and

(b)           you had immediately bought it back for the same amount.

According to the Supplementary Explanatory Memorandum (EM) to Tax Law Improvement Bill 1997 (TLIB 1997) which inserted Division 70 of the ITAA 1997, the section applies to genuine changes in an asset's use and not in relation to putting trading stock to another minor use. Whether there is a genuine change is to be determined objectively (see paragraph 1.28 of the EM to TLIB 1997).

Taxation Determination 92/127 Income tax: property development: if land is acquired for development, subdivision and sale but the development is abandoned and the land sold in a partly developed state, how is a profit on the sale of the land treated for income tax purposes? states that the land is treated as trading stock when it is acquired and during the time the development activities are being conducted. After the development activities cease, the land is no longer treated as trading stock because the taxpayer is not carrying on a business of trading in land (see paragraph 2 of TD 92/127).

As noted above, the property was initially acquired by Entity A for the purpose of development and was accounted for as trading stock of Entity A. However, sometime during the year ended 30 June 202xx, the Property development activities were abandoned and as such it is necessary to consider whether the property ceased to be trading stock pursuant to subsection 70-110(1). In this regard and as noted above, the Supplementary EM provides some guidance and states that the section applies to genuine changes in an asset's use and not in relation to putting trading stock to another minor use.

In assessing a genuine change in the assets use the following is considered relevant:

•                     Record of interaction between Entity A's stakeholders regarding the decision to sell the Property confirmed that:

­        Entity A' investment in the Property was primarily intended for development.

­        Uncertainty in Entity A's operations, potentially leading to a revised intention (abandonment) of the development.

­        The sale of the Property was preferred over leasing, confirming that leasing was never part of Entity A's long-term strategy.

•                     The Property is not included as trading stock in Entity A's financial records in the subsequent years, following the abandonment.

•                     There is no evidence that Entity A continued to actively pursue the development, thereby carrying out the business of development.

•                     Entity A entered a contract for the sale of the Property.

In light of the facts outlined above, the Commissioner accepts that there was a genuine change in the intention of the applicant regarding the Property and Entity A ceased holding the Property as trading stock at some time during the year ended 30 June 20xx.

Therefore, it is considered that section 70-110(1) applies when the Property stopped being held as trading stock by Entity A.

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