There are special rules that set out the tax consequences that apply where a developer commences to hold property that they already own as trading stock or where a developer ceases to hold, as trading stock, property they continue to own (e.g., the developer might commence to hold the property as a capital asset).
Developer commences to hold property as trading stock
Section 70-30 provides that, where an asset (e.g., land) held by a taxpayer was not trading stock when it was first acquired but later becomes trading stock upon being committed to a business of property development, the taxpayer is taken to have sold that land to an arm’s length party and to have re-acquired it at that same value. In these circumstances, the taxpayer may elect (under S.70-30) to bring the land in as trading stock at either cost or market value:
(a) Cost – Generally, the cost of land acquired in these circumstances is (under S.70-30(3)) what would have been its cost for the purposes of S.70-45 (about valuing stock at year-end) if it had been trading stock of the taxpayer when it was acquired (unless it was acquired for no consideration, in which case the cost is worked out under S.70-30(4)). If a taxpayer elects to bring the property in at cost, there will be no CGT consequences. Refer to S.118-25(2).
(b) Market Value – The ATO considers that, where land originally acquired as a capital asset later becomes trading stock, its market value is determined with regard to the ‘highest and best use’ that can be made of it. Due weight must be given to the land’s potential utility and to the likelihood of approval being obtained for that potential use. Refer to TD 97/1.