Edited version of private advice

Authorisation Number: 1051914471212

Date of advice: 2 November 2021

Ruling

Subject: Trading stock under section 70-30

Question

Did the taxpayer start holding the Property as trading stock under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997) on the date the amended Planning Permit was issued?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances:

X has a history of involvement in land and property development.

X and Y purchased a block of land in 20XX of a significant size. It is submitted they originally planned to build their principal residence on the Property and to use the balance land as a hobby farm, and that they felt that this would be good lifestyle change.

It is further submitted that they changed their plans in 20XX. As there were no suitable schools for their children, they decided they wanted to live closer to the city.

X and Y created a partnership in 20XX with each of them as partners (the taxpayer). The taxpayer was issued an ABN in 20XX. X together with Y were the principal decision makers of the taxpayer.

In 20XX X and Y agreed to a council proposal in relation to a Development Plan which included an agreement to the payment by X and Y of contributions to agreed costs. The Property was subsequently rezoned to 'residential 1' in 20XX.

A Development Plan was issued in 20XX by council.

In 20XX, X and Y engaged town planners to obtain a Planning Permit on their behalf. They had several meetings with the town planner to discuss the application.

In 20XX, X and Y submitted a Planning Permit application to the council to subdivide the Property.

X and Y were issued with a Planning Permit in 20XX.

X and Y determined that the conditions imposed on the development of the Property under the Planning Permit made development uneconomical.

X and Y challenged those conditions in the Victorian Civil and Administrative Tribunal (VCAT).

A number of activities were undertaken by X and Y in relation to the litigation, including meeting with consultants and lawyers, attendance at hearing days and attendance at negotiation meetings.

The VCAT objection was allowed, and an amended Planning Permit was issued.

Following the issue of the amended Planning Permit, X and Y engaged in further activities with respect to the development of the Property.

The Property has always remained vacant and was never used by X and Y for business or recreational purposes. X and Y allowed a local farmer to graze his cattle on the Property at no cost.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) - section 70-10

ITAA 1997 -section 70-30

Reasons for decision

Section 70-10 of the ITAA 1997 discusses the meaning of trading stock. Section 70-10 of the ITAA 1997 provides as follows:

'(1) 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) * live stock.'

The question is whether the Property was held for purposes of manufacture, sale or exchange in the ordinary course of a business prior to the date the amended Planning Permit was issued.

Paragraph 1 of Taxation Determination TD 92/124 'Income tax: property development: in what circumstances is land treated as "trading stock"?' (TD 92/124) states:

'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.'

A business activity which involves dealing in land '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 stated further that:

'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.'

The Commissioner is of the view that:

•         the Property was held for the purpose of resale; and

•         a business activity or activities which involved dealing in the Property had commenced

on a date prior to the date the amended Planning Permit was issued, for the reasons expressed below.

History of property development

X has been involved in property developments for a number of years.

X's history of involvement in development activities and in the conduct of property development businesses does not itself establish that the Property in this case was held at the outset for the purposes of development.

However this factor, taken together with other considerations as outlined below, forms an integral part of the circumstances in this case that are material to the formation of the Commissioner's view.

The purchase of the Property in 20XX

X and Y purchased the Property in 20XX. It is claimed that X and Y originally planned to build their principal residence on the Property and to use the balance land as a hobby farm.

Despite this stated intention, it is considered relevant that:

•         at no point in time did they live at the Property; and

•         at no point in time was the Property used as a farm. Instead, the Property had always remained vacant and they allowed a local farmer to graze his cattle on the Property at no cost.

The following matters are also considered relevant:

•         the large size of the Property and large scale of the later development; and

•         their submissions that their stated plans for the Property changed in approximately 20XX; whereupon they abandoned their plans to reside in the property and resolved to keep their options open with regard to the use of the Property.

Rezoning of Property in 20XX

While the rezoning was at the instigation of the Council, the activities undertaken and the liability assumed by X and Y are consistent with an intention to hold or use the land ultimately for the purposes of resale; and, taken together in the context of all the activities that have been conducted with respect to the Property, constitute part of the activities that may be considered dealings in the Property as per TD 92/124.

From 20XX

Consistently with the abovementioned activities, further activities were undertaken by X and Y that, taken together, indicate the holding of the Property with the intention that it be sold, with or without X and Y undertaking construction on the Property

It is submitted by the taxpayer that it was only after the allowance of the objection to VCAT that X and Y sought professional external advice on whether the Property should be sold in a developed or an undeveloped state.

The following considerations are relevant in this regard:

•         The commencement of a business of 'property development' can precede the time at which a final decision is made as to whether to carry out construction: see Case P51 82 ATC 231; and Case F15 74 ATC 59, which reflect the view that the business of property development may exist notwithstanding that a decision may ultimately be made to dispose of the property without construction.

•         In Case P51, the taxpayer sold properties at various stages of development: several were sold after construction had been completed on the land, while others were disposed of without construction (the various disposals occurring at different points in the taxpayer's dealing with the properties). The sale of all the properties were held to fall within the broad scope of the general business of property development, being variations within the broad umbrella of the business conducted by the taxpayer.

•         The taxpayer's 'business' in this case encompasses a broad range of activities taken in pursuit of the (broader) purpose of property resale, and includes the steps taken in preparation for - and to facilitate - that sale, whether or not it was ultimately resolved that any construction on that property should proceed.

That is, even if X and Y had seriously contemplated selling the Property in an undeveloped state after receiving advice, this is not inconsistent with the view in light of the abovementioned facts that they had, prior to the date the amended Planning Permit was issued, commenced activities that indicate the carrying on of a business.

•         The Commissioner notes in this regard that the property developments with which X has been involved have, similarly, ranged widely from those resulting in the sale of property for which permits were obtained but on which no construction was conducted by X and Y, to the sale of properties following construction being undertaken by X and Y.

•         It is also noted that, consistent with the above, land can be trading stock before it has been turned into the condition in which it is intended to be ultimately sold - that is, land intended to be sold after subdivision is still trading stock before it is subdivided (R & D Holdings Pty Ltd v DCT [2006] FCA 981 and FCT v St Hubert's Island Pty Ltd (In Liq) [1978] HCA 10; (1978) 138 CLR 210).

For the reasons expressed above, the taxpayer did not start holding the Property as trading stock under section 70-30 on the date the amended Planning Permit was issued.