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Edited version of your private ruling
Authorisation Number: 1012539195016
Ruling
Subject: Trading stock and net profit on sale of land is assessable income
Question
Is the partially developed land considered trading stock and the net profit on the sale considered assessable income of the entity?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
The entity's main and sole business is to purchase land, build buildings and sell them.
A parcel of land was purchased and partially developed.
You intend to sell the land in its partially developed state.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 70-10
Reasons for decision
Section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states trading stock includes:
(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and
(b) livestock.
Taxation Determination TD92/127 discusses 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 the profit on the sale of the land treated for income tax purposes?
Paragraph 1 states net profit made on the sale of the land is assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (rewritten as ITAA 97 6-5(1); (2); (3); 6-10(1); (2); (4); (5); 6-15) .
An example in which the proceeds were considered ordinary income was Case F15, 74 ATC 59. In that case the taxpayer company, one of several companies formed by a builder and his wife, was engaged in the business of building flats and selling them. It was claimed that certain land was acquired by the company to erect flats thereon which were to be retained for letting. However, certain difficulties arose and the land was resold at a profit. The purchase and sale of the land were regarded as acts in the ordinary course of the taxpayer company's business as a builder engaged in buying sites and erecting buildings thereon in order to sell the land and buildings at a profit. Accordingly, the profit on the land was a business receipt assessable as ordinary income.
In your case the subject land was purchased with a view to develop and sell it. The entity is in the business of purchasing land and building structures for sale. As the subject land was acquired for the purpose of sale in the ordinary course of your business it is considered trading stock. As the land will be sold the net profit is assessable income under subsection 6-5(1) of the ITAA 1997.