Definition and Nature of Property Development Business
Generally, the first issue to consider in determining the tax treatment arising from the sale of real property is whether the property was sold in the ordinary course of a property or land development business. If this is the case, the property is generally trading stock of the taxpayer, which means the transaction is taxed under the trading stock provisions in Division 70.
The trading stock provisions provide an exclusive (and relatively well-understood) tax regime. The provisions apply to the exclusion of the CGT regime (refer to S.118-25) and the profit-making scheme. For present purposes, note the definition of trading stock in S.70-10 includes:
“…anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business …”
Based on this definition, and as set out in TD 92/124, land held by a taxpayer is considered to be trading stock in circumstances where both of the following two requirements are met:
- The land is held for resale; and
- A business that involves dealing in the land has commenced
Determining the date on which a property development business commences is important from a trading stock perspective. If the taxpayer is not carrying on a business at the time of acquisition, it is necessary to pinpoint, as accurately as possible, the date of commencement, because this will be the time at which the property becomes trading stock (assuming it is held for resale in the business). In these circumstances, it will be necessary to consider the rules governing the movement of an asset into the trading stock regime-refer under heading 3.4.
In TD 92/124, the ATO provides that a business activity commences when a taxpayer “…embarks on a definite and continuous cycle of operations designed to lead to the sale of the land”.
TAX TIP – Carrying on a property development business
Whether a taxpayer is carrying on a business of property development is a question of fact and degree and therefore depends on the particular circumstances of each case. To assist in this regard, in TR 97/11, the ATO provides several factors that may be relevant in deciding whether an activity constitutes a business. These include, for example:
- whether the activity has a significant commercial purpose or character.
- the size, scale, and permanency of the activity.
- whether the taxpayer has more than just an intention to engage in business.
- whether the taxpayer has the purpose and prospect of profit from the activity.
- the repetition and regularity of the activity (although, note that, in some (limited) circumstances, a single acquisition of land for development and sale can constitute a business – refer to TD 92/124 and below).
- whether the activity is planned, organized, and carried on in a businesslike manner directed towards making a profit; and
- whether the activity is better described as a hobby, recreation, or sporting activity.