What is the cost of land held as trading stock?
The costs incurred by a property developer to acquire and develop land that is not immediately deductible are generally ‘caught up in the cost of trading stock. The concept of ‘cost’ is central to the trading stock provisions. For example, the cost of trading stock is deductible under S.8-1 and, in making an adjustment for trading stock at year-end, one option available to the taxpayer is to value trading stock at cost.
The term ‘cost’ is not defined. However, in the context of valuing land at cost for trading stock purposes, based on Philip Morris Limited v FCT (1979) 10 ATR and FCT v Kurts Development [1998] FCA 1037 (‘Kurts Development’), cost should be determined on a full absorption basis, which encompasses the purchase price plus appropriate costs associated with bringing the trading stock into its existing condition and location. Such costs include the following:
- The cost of materials (including the cost of the land).
- Direct labour costs.
- Production overheads costs (e.g., wages and depreciation).
- Infrastructure costs (e.g., cost of establishing services on land, parks, roads, etc.).
Are infrastructure costs included in the cost of trading stock?
The following ‘infrastructure costs’ commonly form part of large property development:
(a) Internal infrastructure land – The portion of the land on which services etc. are to be built, which is transferred to the council. This is often a condition of obtaining council approval.
(b) Internal infrastructure work – These are the costs of providing services and facilities such as roads, kerbing, channelling, paths, sewerage, drainage, electricity and phone lines on the ‘infrastructure land’. This is often a condition of obtaining subdivision approval.
(c) External infrastructure costs – This refers to the payments made to a local council or other authority for ‘headworks’, including the provision of services and facilities that are not on the land owned by the taxpayer (e.g., such costs include work undertaken to upgrade roads, water and sewerage mains, etc., which are adjacent to the land (i.e., not on the land)).