ATO ID 2004/532: Income Tax: business of subdivision - time when land becomes trading stock
Date of decision: 17 December 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
When does land that was originally acquired and used for farming purposes and later ventured into a business of subdivision, development and sale, become trading stock of the taxpayer for the purposes of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Land that was originally acquired and used for farming purposes and later ventured into a business of subdivision, development and sale, becomes trading stock of the taxpayer, for the purposes of Division 70 of the ITAA 1997, when it is ventured into a business of development, subdivision and sale.

Facts
The taxpayer originally acquired land for farming purposes. The taxpayer later ventured the land into a business of subdivision, development and sale. The taxpayer intends to sell the land in subdivided lots. At the end of the current year, the land has not yet been subdivided into separate lots ready for sale. The proceeds from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997.

Reasons for decision
Summary: Under section 70-10 of the ITAA 1997 trading stock is defined to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. Taxation Determination TD 92/124A clarifies that land will be 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. The decision in Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 confirms that broadacre land (that is, not yet subdivided) is trading stock of a property developer. As the taxpayer is regarded as being in the business of subdivision, development and sale of land, the proceeds from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997. The taxpayer's land will be treated as trading stock when the land is ventured into the business of development, subdivision and sale. When an asset is ventured into the business of development, subdivision and sale is a matter of fact. However, TD 92/124 provides guidance that a 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.

Legislative references: Income Tax Assessment Act 1997 section 6-5 Division 70 section 70-10
Case references: Federal Commissioner of Taxation v St Hubert's Island (1976) 6 ATR 183 (1976) 76 ATC 4080
Related ATO interpretative decisions: ATO ID 2004/128
Subject references: Business income Carrying on a business Income Ordinary course of business Real estate as trading stock Subdivided farm land