Land held by a taxpayer as trading stock must be valued at year-end at cost, market selling value, or at replacement value.
TAX TIP – When will land held as trading stock be ‘on hand’?
The effect of S.70-35 is that all trading stock on hand at the start and the end of the income year is taken into account when working out the taxpayer’s assessable income and deductions. Trading stock is considered to be ‘on hand’ if the taxpayer has ‘dispositive power’. However, it is not always necessary for the taxpayer to have an ownership or physical possession of the stock. Refer to IT 2670 and the decisions in FCT v Suttons Motors (Chullora) Wholesale Pty Ltd [1985] HCA 44 and All States Frozen Foods Pty Ltd v FCT [1990] FCA 79.
However, if a taxpayer does not have ‘dispositive power’ over its share of the land at year-end, this does not mean that it can claim a deduction for its development costs. Rather, S.70-15(3) ensures that any outgoings incurred in connection with acquiring an item of trading stock, which has not become part of trading stock on hand during that year, are not deductible until the year in which it becomes part of the taxpayer’s trading stock on hand. In the case of land to be held as trading stock, development costs form part of the cost of acquiring trading stock. Allotments of land held by property developers will be trading stock ‘on hand’ until the settlement of their sale (the proceeds of the sale are not included in assessable income until settlement).
How is land held as trading stock valued?
Land held by a taxpayer as trading stock must be valued at year-end at cost, market selling value, or at replacement value. Refer to S.70-45.
Generally speaking, ‘market selling value’ means what the asset could be sold for to third-party purchasers. This method may be more difficult to use during the development phase (i.e., partly developed property), as opposed to determining the market selling value of developed property. If market selling value is used, the taxpayer should consider obtaining a formal valuation from a registered valuer to ensure they have sufficient evidence in the event of an ATO audit. Refer also to the ATO factsheet: ‘Market valuation for tax purposes.
‘Replacement value’ refers to the cost of replacing a ‘substantially identical item’. The difficulty of using this method in the context of a partly completed property development (or broadacre subdivision) was discussed in Parfew Nominees Pty Ltd v FCT [1986] VicSC 436. The concern in this regard is that there is often no equivalent item to price the replacement of land.