Edited version of your written advice

Authorisation Number: 1051209952660

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

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Date of advice: 7 April 2017

Ruling

Subject: Property - subdivision - carrying on a business - profit making undertaking.

Question 1:

Will the profit on the sale of the subdivided lots be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Will the profit on the sale of the subdivided lots be assessable under Section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No.

Question 3:

Will the profit on the sale of the subdivided lots be assessable under section 15-15 of the ITAA 1997?

Answer:

No.

Question 4:

Will the profit on the sale of the subdivided lots be assessable under Parts 3-1 and 3-3 of the ITAA 1997?

Answer:

No.

This ruling applies for the following periods

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

The scheme commences on

1 July 2016.

Relevant facts and circumstances

Prior to 20 September 1985, the Trust was created. The Trust is a discretionary trust which was established for the benefit of a family with Person A being the Trustee of the Trust (You)

A number of months after the Trust was created, it was resolved at the Trust meeting that you would make an offer to purchase the Property for the amount of $XX,XXX. Under the resolution you would apply to a bank to borrow $XX,XXX to finance the purchase of the Property with the balance of the purchase price being advanced by Person B, together with all stamp duties and registration fees.

Settlement on the purchase of the Property was to occur shortly after the Trust resolution was made.

The land area of the Property was less than 10 hectares and was zoned as Rural.

The title of the Property was issued shortly after settlement had occurred.

Around the time that the title was issued a Declaration of Trust was declared by you under which the Property was held on trust as established by the Trust Deed, and that the Property had been purchased by you as the Trustee of the Trust, with the whole purchase price of the Property being provided out of the Trust funds.

The Declaration of Trust was lodged with Landgate which resulted in the Register of Titles lodging a caveat over the Property on a number of months after the Declaration of Trust was made to protect the interests of the beneficiaries of the Trust.

Bore water pumps and an irrigation system were installed, and sheds were constructed on the Property in preparation for the marketing gardening activities to be undertaken on the Property, including the growing of onions and potatoes.

Crops were planted, however it was determined that the Property would be leased to Company A for a weekly rental amount of $XX.XX, plus outgoings such as all rates, taxes and other outgoings, until such time that the market garden became productive.

The directors of the Company are Person A and their spouse.

From shortly after the title of the Property was issued the Property was leased by Company A to be used to store machinery, material, plant and equipment as required by Company A in the sheds located on the Property.

The rental amount paid by the Company was increased in accordance with resolutions made at your meetings over the years, increasing from $XX.XX to $XXX.XX per week, to the annual sum of $X,XXX.

A number of years after the Property was purchased, you became aware that Company Z was acquiring options to purchase properties surrounding the Property, which it did for a number of years, including the property adjacent to the Property.

Company Z commenced developing the property adjoining the Property, being Lot 1, into residential lots for sale.

A number of years later, Company Z approached you to negotiate access to the Property for the purpose of constructing a road to service the subdivision on Lot 1. It was proposed that the road (the Road) would act as the major connection between the subdivision of Lot 1 and the nearby main road. Part of the Road would be constructed wholly on a section of the Property, with the remainder to be constructed partially on the Property.

In the following year negotiations between you and Company Z in relation to the construction of the Road on the Property commenced.

A number of years later an agreement (the Agreement) was executed between you, Person A in their personal capacity, and Company Z. Under the Agreement, the following would occur:

Company Z would construct earthworks on the Property so that it could develop Lot 1;

Person A in their personal capacity, and you, would have a licence to use a compound constructed by Company Z on Lot 1 to store the equipment and other items previously located on the Property; and

You and Person A would pay Company Z a contribution fee of $XXX,XXX, including Goods and Services Tax (GST).

The sheds on the Property were demolished to accommodate the development of the Road on the Property and the Company A's plant and equipment were stored in a compound constructed by Company Z on Lot 1.

The construction of the Road on the Property resulted in some parts of the Property being vested as a road reserve.

As a result of the Agreement, the land area of the Property was reduced.

You have not at any time up to this point put the Property on the open market.

A number of years after the Agreement was executed, Company Z made an offer (the Offer) to purchase the Property for $XX,XXX,XXX.

You sought advice from Person C of Company AB in relation to the Offer. Person A and Person C were acquaintances, with Person C being a former consultant employee of Company Z, who had left Company Z and established Company AB.

During the discussion with Person C the pros and cons of the Offer had been considered in relation to subdividing the Property or selling the Property. You had determined that the sale of the Property by subdivision was the best way to obtain the maximum sale price, providing a better outcome than an acceptance of the Offer. It was also anticipated that sale for the Property on the open market would most likely result in offers below the Offer as the Offer had included a premium due to the Property's importance to Company Z for their own development activities.

Other factors taken into consideration when making the decision were that You is elderly and is experiencing deteriorating health, the surrounding properties have either been developed, or are subject to development, and the Property has been broken into on a number of occasions.

Taking that into consideration, and based on the advice received from Person C, you determined that the outright sale of the Property on the current market would not result in an outcome that was better than that expected from the sale of the proposed subdivided lots. You had anticipated that taking the path of sale by subdivision would realise the maximum sale price for the Property for the benefit of the beneficiaries of the Trust.

After consulting with Person C, the Offer was not accepted because:

It was anticipated that sale of the Property on the open market would most likely result in offers below the Offer as the Offer had included a premium due to the Property's importance to Company Z for their own development activities

The Offer did not reflect the maximum possible realisable value of the Property even though it had included premium because it was essential to Company Z's development that it either had ownership of, or access to the Property;

It was considered that the sale of the Property by subdivision into residential lots would realise a higher amount of between $XXX,XXX to $XXX,XXX for each subdivided lot. Therefore, on the basis that the Property was subdivided into a specified number of lots the total gross amount from the sale of those subdivided lots was calculated to be $XX,XXX,XXX; and

It was considered that the Offer would not provide maximum value to the Trust and it's beneficiaries.

You did not obtain a valuation of the Property as you had relied on the advice of Company AB when making your decisions in relation to the best outcome for the Trust and its beneficiaries.

Due to issues with the original scope of the works as contained in the Agreement, discussions were held between Person A and Company Z's representatives which resulted in a Supplementary Agreement (the Supplementary Agreement) to the original Agreement being entered into.

Shortly after the Supplementary Agreement was entered into, Company Z lodged a caveat over the Property.

A number of months later, the earthworks and services on the Property were completed and Company A reverted to storing its materials and equipment in the compound restored on the Property by Company Z as part of the Agreement.

A short time later Company AB sent Person A a letter in relation to the formal terms of appointment of Company AB to manage the development, marketing and sale of the Property (the Company AB Agreement), which outlined the terms and conditions for the subdivision of the Property into a specified number of lots.

After a number of days, Person C and Person A signed the Company AB Agreement.

During the following month, Company AB received a letter from Company D in relation to a request for a revised fee submission for the provision of engineering consultancy services for the development of the Property, which outlined the following:

Shortly after, an alternative proposal to the original fee proposal was provided by Company C which provided for the subdivision of the Property into more lots than had been outlined in the first option.

During the following month, a Draft Concept Subdivision Plan was prepared by Company C.

A number of months later, Company E sent Person A, a surveying consultancy fee proposal which broadly included the following:

Costs include:

Initial phase subtotal - $X,XXX lump sum; and

Construction and legal phase subtotal cost per lot - $XXX; and

Scope of works includes surveying, preparation of pre-calculation plan for the engineer and other consultants, stage by stage construction control survey, pegging, and preparation and lodgement of Deposited Plan to Landgate, issuing of Condition Clearance Request letters and receipt and lodgement of Clearance letters.

During the same month a Development Feasibility Model was prepared by Company F which outlined the following:

Company AB lodged an application for the approval of the subdivision which outlines the following information:

The services of the following entities will be engaged to undertake activities in relation to the subdivision of the Property:

It is estimated that the sale price of the subdivided lots will vary from $XXX,XXX to $XXX,XXX, depending on market factors, lot sizes, and where the lots are located on the Property, such as closest to the POS's.

You anticipate that the subdivision of the Property will be undertaken in a number of stages, dependent on a number of factors including market considerations, with the sale of the lots in the preceding stage funding the lots in the following stage.

The subdivision activities are expected to be completed in around four years, with the final sale of the lots to occur in around four years.

You will use your own funds to finance the subdivision of the Property. Following the initial stage of subdivision, the sale proceeds from the lots sold in the first stage will be used to fund the next stage, and so on, until the entire Property is subdivided and sold.

The titles of each of the proposed subdivided lots will be in your name.

The subdivided lots will be sold as vacant lots, with the infrastructure work in accordance with the subdivision approval, with no improvements constructed on them.

Neither you, nor any related entities have undertaken any similar activities in the past and do not intend to subdivide any other properties owned by them.

The Company's present lease of the Property will expire in mid- 2017, however it will find other premises to store its materials and equipment after the subdivision of the Property.

Assumptions

This ruling decision has been made on the assumption that the subdivision of the Property will be undertaken in accordance with:

The terms of the Company AB Agreement; and

The application for the approval of the subdivision of the Property lodged by Company C.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 25A

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Subdivision 70-10(1)

Income Tax Assessment Act 1997 Section 118-20

Reasons for decision

Question 1:

Will the profit on the sale of the subdivided lots be assessable under section 6-5 of the ITAA 1997?

Detailed reasoning

Taxation treatment of property sales

Broadly, there are three ways profits from a land development, subdivision and sale can be treated for taxation purposes:

As ordinary income as a result of carrying on a business of property development, involving the sale of land and buildings as trading stock;

As ordinary income as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, where the land was acquired or subsequently held for the purpose profit making; or

As statutory income under the capital gains tax legislation as a result of the sale of a capital asset.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Change of intention

While holding an asset for a considerable period of time may seem to indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition and throughout the ownership period is a crucial aspect.

Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693) (Myer Emporium)is one of the leading cases which shows that the intention at the time of purchasing the asset is an important consideration in determining whether the proceeds received on disposal are on a capital or revenue account. According to the Myer Emporium case, the relevant intention or purpose of the taxpayer is not a subjective test. Rather, it is the intention or purpose as discerned from an objective consideration of the facts and circumstances of the case. Also, if the taxpayer is a company or trust, the courts determine its purposes by looking at the people who control the entity.

Further, the decisions in Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135, 37 ATR 358 and McCorkell v. Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 demonstrate that if a taxpayer does not intend to make a profit when he or she acquires farming land then the likelihood that any profit made on the eventual sale of land is ordinary income is greatly diminished.

Numerous cases have concerned the assessability of profits or proceeds from the sale of land. The two leading Australian cases dealing with the change of intention and the disposal of capital assets on revenue account are Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950)81 CLR 188 (Scottish Mining case) and Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords Beach). These cases are much relied on in argument in the present case.

It follows from the decisions in Scottish Mining and Whitford's Beach cases that a taxpayer, who had originally acquired property for farming operations purposes, could subsequently embark on a profit making scheme. This means that a taxpayer could embark on a profit making scheme after property was acquired for a different purpose.

Carrying on a business of property development

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts.

Taxation Ruling TR 97/11 (TR 97/11) provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. Those factors are:

Whether the activity has a significant commercial purpose or character

Whether the taxpayer has more than just an intention to engage in business

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

Whether there is regularity and repetition of the activity

Whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

Whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

The size, scale and permanency of the activity, and

Whether the activity is better described as a hobby, a form of recreation, or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Application to your situation

In the context of considering the above authorities and factors when determining whether your activities would be viewed as carrying on of a business, the following general observations of your situation can be made:

The Property was purchased prior to 20 September 1985, to be used for market gardening; however you commenced leasing the Property to Company A in the income year after the Property was purchased;

The Property was not offered for sale as broad acres;

You were offered $XX,XXX,XXX in an outright purchase of the Property;

You had not accepted Company Z's offer based on the advice received from Person C that you would receive a greater return on the Property if you subdivided it;

There has been a change in the purpose for which the Property is being held, being a change from earning rental income to subdividing the Property

There has been a change in the nature of the Property with the proposed subdivision transforming the Property from broad acres into small residential lots;

There is a coherent plan for the subdivision of the Property which is more complex than what would have been involved in the disposal of the Property as broad acres;

The subdivision includes a specified number of lots and public open spaces, numerous T-intersections, with provisions made for road connections to subdivision and developments in the surrounding area, and will include connection to various services;

The estimated Gross Revenue from the sale of the subdivided lots is $XX,XXX,XXX, with total costs of $X,XXX,XXX;

Company AB will receive a fee of a specified percentage, plus GST, of the Gross Revenue which will be payable on the settlement of each subdivided lots. The fees will include all development management services, marketing management service (excluding costs of marketing collateral) and all sales commissions payable to the sales representative. GST will be included in the purchase price of each subdivided lot. The fees will be distributed to Acumen upon each lot being settled;

A natural consequence of the scope and scale of the arrangement is the sophisticated manner which it will be carried on over a lengthy period of time, estimated to be undertaken in numerous stages over a number of years;

You have approached the subdivision of the properties in a businesslike way and have sought expert advice, and have engaged the services of professionals in relation to the subdivision activities;

The legal title to the property remains with you and you have the authority to provide the relevant consents and approvals in relation to the subdivision of the properties;

You are funding the subdivisions activities using your own funds, with the proceeds from the sale of the subdivided lots in the first stage being used to fund the next stage, and so on; and

You:

Will pay the invoices, which are in your name, after they have been approved by Company AB;

Will approve the marketing and advertising costs in advance;

Will approve the sales value of each subdivided lot;

Have the option to sell the project prior to its completion; and

Will approve the annual budget and business plan presented by Company AB at the commencement of each financial year, prior to them proceeding with any work, marketing or sales.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion the intention for holding the Property has changed upon the commencement of the subdivision of the Property to one of carrying on a business.

Company Z offered you $XX,XXX,XXX for the Property, which had included a premium due to the importance of the Property to Company Z's development of the adjoining land. You did not accept Company Z's offer which shows a conscious decision to pursue the development in lieu of the outright sale offer.

The simplest way you could have divested yourself of the Property would have been to dispose of it without seeking any subdivision approvals and without actually undertaking the associated works. However, you have made no attempt to sell the Property as broad acres and had refused Company Z's offer as you had anticipated that taking the path of sale by subdivision would realise the maximum possible sale price for the Property.

You have approached the transaction in a businesslike way, seeking advice from professionals and engaging the services of Company AB and other parties to lodge the relevant applications, undertake surveys and investigations, and prepare reports. The inherent nature of the subdivision of the Property is such that it is quite complex given that the process of physically undertaking the subdivision works involves complexities requiring specialist knowledge, the engagement of specialist contractors and the co-ordination of the said parties. While you have engaged third parties to undertake the subdivision activities, this does not preclude you from being in a business.

The acquisition of the relevant development approvals is not a simple transaction. It involves obtaining information as to the extent that the Property can be developed, having plans drawn up and liaising with council to have the proposal approved. The acts of seeking approvals and undertaking of the subdivision work must in some way contribute towards a finding that the overall activity constitutes something more than a 'mere realisation' of a capital asset.

Given that the Property had been purchased for market gardening purposes, but had commenced being used to earn rental income around twelve months after the Property had been purchased, there is a complete lack of nexus of the subdivision of the Property to the previous rental earning activities which indicates a clear change of intention to cease one activity and commence a new discrete activity. That is, to change the intention in relation to the Property from earning rental income to developing the Property for the purpose of selling the subdivided lots.

The change in your plans in relation to the Property is aimed at having the maximum possible number of subdivided blocks to receive the maximum amount of profit from the sale of the subdivided lots.

In accordance with TR 97/11, it is viewed that the subdivision of the Property will be a significant commercial activity, and your goal in undertaking the subdivision is to make a significant profit from the sale of the subdivided lots. There will be repetition and regularity of the activities given that there will be the marketing and sale of 85 lots, while the subdivision is a “one-off” venture.

Prior to any monies being paid to you, Company AB will be paid their fees from the Gross Revenue indicating it is the return to risk (profits) of the development which you share. The decision to pursue the development in this manner shows a choice to engage in exposure to the risks of the development, including the profits, losses and its general success.

Based on the information and documentation provided, and taking the factors as outlined in TR 97/11 into consideration it has been determined that your subdivision activities will amount to a carrying on of a business of subdividing and selling land. Therefore, the profits from the sale of the subdivided lots will be assessable under section 6-5 of the ITAA 1997.

Question 2:

Will the profit on the sale of the subdivided lots be assessable under Section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

Section 25A of the ITAA 1936 applies to the sale of property acquired prior to 21 September 1985. However, it will not apply to a profit arising in the 1997-98 income year or later income years from the carrying on or carrying out of a profit-making undertaking or scheme, even if the undertaking or scheme was entered into, or began to be carried on or carried out, before the 1997-98 income year.

Application to your situation

While you purchased the Property before 21 September 1985, as outlined above, to be considered to have carried on or carried out a profit-making undertaking or plan under section 25A of the ITAA 1936 the gain making needs to have been conducted prior to 1997-98 year.

As the sale of the subdivided lots will occur after the 1997-98 income year any anticipated gain realised from the sale of the Property will not be assessable income pursuant to section 25A of the ITAA 1936. Therefore, this section is not applicable to your situation.

Question 3:

Will the profit on the sale of the subdivided lots be assessable under section 15-15 of the ITAA 1997?

Detailed reasoning

Section 15-15 of the ITAA 1997 includes in assessable income any profit from the carrying on or carrying out of a profit-making undertaking or plan and is applicable when an asset was acquired before 20 September 1985 and the profit arises after 1997-98 year.

Taxation Ruling 92/3 (TR 92/3) states at paragraph 35 that when a taxpayer makes a profit from an isolated transaction other than in the course of carrying on a business, the amount will be income where:

(a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

(b) The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

For a transaction to be characterised as a business operation or commercial transaction, it is sufficient if the transaction is business or commercial in character.

As discussed under question 1, case law has concluded that the mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within meaning of section 15-15 of the ITAA 1997, even though the realisation is effected in the most advantageous manner.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

(a) the nature of the entity undertaking the operation or transaction;

(b) the nature and scale of other activities undertaken by the taxpayer;

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out;

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h) the timing of the transaction or the various steps in the transaction.

Application to your situation

Your activity has the character of a business operation or commercial transaction. However, unlike an isolated transaction it has the necessary repetitious or recurring transactions that show the characteristics of a business, being that it involves the subdividing of the Property into the specified number of subdivided lots, and the marketing and sale of those lots.

As a result, the profit made on the sale of the subdivided lots will be accounted for on revenue account and will be assessable as ordinary income under section 6-5 of the ITAA 1997 and will not be assessable under section 15-15 of the ITAA 1997.

Question 4:

Will the profit on the sale of the subdivided lots be assessable under Parts 3-1 and 3-3 of the ITAA 1997?

Detailed reasoning

Capital gains tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 under section 104-10 of the ITAA 1997 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property.

A capital gain will be made if the cost base of the asset is less than the capital proceeds in accordance with section.

The capital gain can be reduced by the 50% CGT discount if the conditions listed in Division 115 of the ITAA 1997 are met.

Section 118-25 of the ITAA 1997 provides an outright exemption from the capital gains provisions in respect of assets that are trading stock when the CGT event happens.

Application to your situation

After reviewing the facts of your situation and applying the relevant factors set out in TR 97/11, it is the Commissioner's view that the subdivision of the Property and the sale of the subdivided lots will not be a mere realisation of capital assets.

Therefore, as the disposal of the subdivided lots is viewed as a carrying on of a business, any profit made on their sale will be included in your assessable income under section 6-5 of the ITAA 1997 as the sale of trading stock.

However, CGT event A1 will still occur on the disposal of the subdivided lots. Any capital gain made on the disposal of the subdivided lots will be disregarded due to the trading stock exemption.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

CGT event K4

Subsection 104-220(1) of the ITAA 1997 provides that CGT event K4 occurs if:

You start holding as trading stock a CGT asset you already own but do not hold as trading stock; and

You elect under paragraph 70-30(1)(a) to be treated as having sold the asset for its market value.

Subsection 104-220(2) provides that the time of the event is when you start holding the asset.

CGT event K4 may occur when the property is brought in as trading stock depending on the trading stock election that you make.

Treating the land as trading stock

The meaning of trading stock is given in section 70-10 of the ITAA 1997, and includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

Thus a thing can only be trading stock where it is capable of sale or exchange in the ordinary course of a business.

The decision of the High Court in Federal Commission of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 clearly established the principle that land can come within the definition of 'trading stock'. In that case, the High Court determined that land acquired for the purpose of development, subdivision and sale by a taxpayer carrying on a business of property development is trading stock.

The Commissioner's view is set out in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124). Paragraph 1 of the TD 92/124 states that the land is treated as 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.

Paragraphs 2 and 3 of TD 92/124 further explain:

Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity 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 not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

Under Subsection 70-30(1) if you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:

(a) Just before it became trading stock, you had sold the item to someone else (at * arm's length) for whichever of these amounts you elect:

Its cost (as worked out under subsection (3) or (4));

Its market value just before it became trading stock; and

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

When you must make the election

Under Subsection 70-30(2) you must make the election by the time you lodge your income tax return for the income year in which you start holding the item as trading stock.

However, if you do not make the election by then because you do not realise until a later date that you started to hold the item as trading stock, you must make the election as soon as is reasonable after realising that. Otherwise, you can request the Commissioner to exercise his discretion to allow you to make a late election.