Developer Intentions

A recent case before the Administrative Appeals Tribunal (WWXY v FCT [2015] AATA 130) raises a matter that anyone who proposes to develop land should consider.

In the WWXY case a proposed JV development was planned. The Trust owned two adjoining lots acquired to develop with a neighbouring large scale developer. However plans and discussions broke down and the JV didn't progress. So the Trust rented the properties out.

Q : So how is the profit taxed ? CGT or Ordinary Income ?

The ATO private Ruling said its not a mere-realisation of a CGT asset. They claimed the eventual sale was the end result of a commercial development.

The AAT agreed. They considered the intent at the outset established a commercial enterprise. The AAT member also said that even if he had agreed that the taxpayer wasn't in business he would still have found the intent was profit-making from the outset.

Unfortunately for the Trust the land never became trading stock as the business activity did not commence.

Just because a trust was established doesnt give individual taxpayers protection from this view about a commercial operation. This decision is NOT about a trust. The ATO generally look at documents between parties to the activity incl emails etc, finance applications, accountants advice even, local govt applications and approvals, real estate agents, brokers etc.
 
How would that affect this. I am looking at a house that has another block included. I plan to rent it out and build a new one on the vacant block and rent that out. Never sell and will it to my kids
 
Fern - That doesn't sound like developer intentions. Its seems like a decision to rebuild and earn income. The key issue intent to sell and profit from that.
 
The ATO private Ruling said ............the eventual sale was the end result of a commercial development.

The AAT agreed. They considered the intent at the outset established a commercial enterprise. The AAT member also said that even if he had agreed that the taxpayer wasn't in business he would still have found the intent was profit-making from the outset.

Unfortunately for the Trust the land never became trading stock as the business activity did not commence.

huh? they say the land is a business activity but isn't part of trading stock? Isn't it WIP? If it isn't WIP and it's not a fixed asset where the heck does it sit on the balance sheet?
 
huh? they say the land is a business activity but isn't part of trading stock? Isn't it WIP? If it isn't WIP and it's not a fixed asset where the heck does it sit on the balance sheet?

WIP is the other name given to trading stock. Its the accumulated "cost" of the site, build etc. Its a balance sheet item that also affects P&L. That's the accounting view.

In this situation the AAT agreed with ATO that at the time the enterprise commenced there was an intent to acquire land for later resale. It then was assumed to be a CGT asset and rented etc. AAT and ATO considered that renting didn't undo the profit making intent and despite the entity not carrying trading stock they felt it was always held for resale.

I assume the asset was on balance sheet as a CGT asset. Whether its trading stock or a CGT asset its still on balance sheet.
 
ok sorry to labour this but... the AAT/ATO said that despite the taxpayer having the land shown as a fixed asset, it was in fact WIP? this would make sense.
 
ok sorry to labour this but... the AAT/ATO said that despite the taxpayer having the land shown as a fixed asset, it was in fact WIP? this would make sense.

No. It said the intent was to acquire it to sell for a profit. How the accounting treated it has nothing to do with intent. The accounting treatment could have called it furniture, fixtures and fittings. Doesn't matter.
 
No. It said the intent was to acquire it to sell for a profit. How the accounting treated it has nothing to do with intent. The accounting treatment could have called it furniture, fixtures and fittings. Doesn't matter.

sort of yes / no. whilst the accounts showed it as a passive asset (or indeed could have been furniture or whatever), it was clearly always intended to be an active asset. Presumably the accounts were fashioned retrospectively to try to achieve the desired tax outcome, however even the accounts 'should' have (at least initially) shown it as WIP not a fixed asset. Either way the tax outcome is the same... even if it had been transferred from WIP to fixed assets
 
sort of yes / no. whilst the accounts showed it as a passive asset (or indeed could have been furniture or whatever), it was clearly always intended to be an active asset. Presumably the accounts were fashioned retrospectively to try to achieve the desired tax outcome, however even the accounts 'should' have (at least initially) shown it as WIP not a fixed asset. Either way the tax outcome is the same... even if it had been transferred from WIP to fixed assets

A passive investment isn't an active asset for small business concessions. The accounts can say whatever they like. Tax law treats the asset as trading stock when k4 occurs. I saw an accountant treat a developer property (land) as a CGT asset and the build cost as trading stock in the accounts once. Obviously wrong. But they also repeated this view in tax return.
The effect of this meant that they couldn't choose between market value and cost however !!
 
A passive investment isn't an active asset for small business concessions. The accounts can say whatever they like. Tax law treats the asset as trading stock when k4 occurs. I saw an accountant treat a developer property (land) as a CGT asset and the build cost as trading stock in the accounts once. Obviously wrong. But they also repeated this view in tax return.
The effect of this meant that they couldn't choose between market value and cost however !!

ok interesting, thanks
 
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