ATO ID 2003/663: Income Tax: trading stock - surrender of land to State for boundary redescription
Date of decision: 26 June 2003
Year of income: Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Does a taxpayer who owns land held as trading stock dispose of trading stock outside the ordinary course of business for the purposes of section 70-90 of the Income Tax Assessment Act 1997 (ITAA 1997) when the taxpayer surrenders title to the land under State legislation, in order for the State to issue the taxpayer with a new title that redescribes the boundary of the land?

Decision
No. A taxpayer who owns land held as trading stock does not dispose of trading stock outside the ordinary course of business for the purposes of section 70-90 of the ITAA 1997, when the taxpayer surrenders the title to the land under State legislation, in order for the State to issue the taxpayer with a new title that redescribes the boundary of the land.

Facts
The taxpayer is a landowner that holds land as trading stock. The taxpayer's land boundaries comprise a combination of fixed line boundaries and a geographical feature. Works on the land were carried out. The boundary of the part of the land where the works were carried out is defined by the geographical feature. The works on the land disrupted the natural tidal flow and caused sand to build up over time resulting in accretions (an area of land growth) to the land. The relevant State legislation provides that land that becomes raised above the boundary defined by the geographical feature because of the carrying out of works belongs to the State. In the absence of this provision, the accretions would fall within the boundaries of the taxpayer's land because the boundary of the land is defined by the high water mark. In accordance with development requirements, the taxpayer was required to redefine the boundaries of the property to effectively exclude physical accretions to the land that had occurred over time. The only method provided for the correction of boundaries under the relevant State legislation is for the taxpayer to surrender the title of the land to the State, to enable the State to cancel the existing title and to issue a new title to the taxpayer showing the correct boundaries.

Reasons for decision
Summary: Section 70-90 of the ITAA 1997 provides that a taxpayer's assessable income includes the market value of an item of trading stock if the taxpayer disposes of the item outside the ordinary course of the taxpayer's business. The taxpayer holds land as trading stock. Therefore, it is necessary to determine whether the taxpayer has made a disposal of an item of trading stock when the taxpayer surrenders the title deed to the land under State legislation, in order for the State to issue the taxpayer with a new title that redescribes the boundary of the land to exclude certain accretions to the land. Accreted land The relevant State legislation provides that any land that has accreted to land owned by the taxpayer due to the carrying out of works belongs to the State. In this case, the accretions were due to the carrying out of works. Therefore there was no issue of the taxpayer disposing the accreted land since it did not lawfully belong to the taxpayer. Original land The taxpayer was indisputably the owner of the original land which did not arise from accretion. Although the State law requires that the title be 'surrendered' (to correct the boundaries), the surrender is only the first step in the process stipulated for boundary correction, with the State being obligated to issue a replacement title setting out the exact area of land already owned by the taxpayer. In the process of surrendering and reissue of the title, it is clear that any land surrendered because its boundaries have significantly changed by gradual and imperceptible degrees will be held on trust for the registered owner. It has long been established at common law that a disposal of property will only occur where a proprietary right or interest passes at law or equity to another person or entity. ( Glennon v. Federal Commissioner of Taxation ; Carrigan v. Federal Commissioner of Taxation (1972) 127 CLR 503; 72 ATC 4181; (1972) 3 ATR 263 per Walsh J). As the State holds the land on trust for the registered owner, the registered owner still has the beneficial interest in the land. The surrender of the title to the State does not have the effect that the taxpayer is no longer the owner of the land and the issue of a new title does not give, devolve or confer any interest in the land upon the taxpayer. At all times the taxpayer retains beneficial ownership of the land. In these circumstances, it is considered that no disposal of the land has occurred. Therefore, the taxpayer does not dispose of trading stock outside the ordinary course of business, for the purposes of section 70-90 of the ITAA 1997, when the taxpayer surrenders the title to the land under State legislation, in order for the State to issue the taxpayer with a new title that redescribes the boundary of the land.

Legislative references: Income Tax Assessment Act 1997 subsection 70-90(1)
Case references: Glennon v Federal Commissioner of Taxation
Related ATO interpretative decisions: ATO ID 2003/518
Subject references: Disposal of assets Disposal of trading stock Disposals not in the ordinary course of business Equitable interests Land tenure & title Legal title Trading stock