Taxation Determination

TD 97/1

Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business?

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FOI status:

may be releasedFOI number: I 1015232

1. The market value of the land is determined having regard to the 'highest and best use' that can be made of the land. Due weight is given to the land's potential utility and to the probability of consent being given for such potential use. In many instances, the value of land is enhanced when it becomes suitable for subdivision.

2. This is an application of a valuation principle known as 'valuation for highest and best use' which is discussed by Messrs R O Rost and H G Collins in Land Valuation and Compensation in Australia (second edition). At page 91, they say:

'Recognition of the willing seller-willing buyer concept necessarily involves valuation for the highest and best use for which the land is adapted. The prudent and well-informed vendor (whose existence must be assumed) would not willingly part with his land for a price less than that appropriate to its highest and best use; and the well-informed buyer would not expect to be able to purchase it for less. Each party would take into account "not only the present purpose to which the land is applied, but also any more beneficial purpose to which, in the course of events at no remote period it may be applied, just as an owner might do if he were bargaining with a purchaser in the market. This is the mode in which the land would be valued." (Said by Isaacs J. in the Spencer case.)'


A taxpayer acquired a rural property on which he conducted farming activity. Some years later, the property is ventured into a business involving the development and subdivision of the land into residential allotments.
In calculating the net profit on sale of the residential lots, the taxpayer should take into account an appropriate proportion of the market value of the land when it was ventured into the business of development, subdivision and sale. The market value of the land is its value as broadacres but taking into account its potential for subdivision and the probability of consent being given for such potential use.

Commissioner of Taxation
22 January 1997

Previously issued as Draft TD 94/D61


ATO references:
NO NAT 96/12074-5

ISSN 1038 - 8982

Related Rulings/Determinations:

TD 92/125;
TD 92/161

Subject References:
land development;
property development;

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