Division 43
By way of background, the Division 43 write-off is based on, amongst other things, the ‘construction expenditure area’. Notably, the ‘construction expenditure’ must be capital, such as where a landowner constructs a building for rent. If, for example, a property developer constructs a building to be held as ‘trading stock’, the construction expenditure is on revenue account (not capital) and therefore, the developer is not eligible for the Division 43 write-off. However, in circumstances where the development constitutes trading stock, S.43-75(3) provides an exception to this rule, being that subsequent purchasers will not be prevented from claiming the write-off, provided the purchaser is not an ‘associate’. Refer to S.43-75(3).
In ATO ID 2014/8, the ATO concludes that a property developer, who decides to retain a property that was originally constructed and held as trading stock for rental purposes, is eligible to claim the Division 43 write-off in respect of that property. The ATO is of the view that the requirements for the exemption in S.43-75(3) are satisfied because the deemed sale and re-acquisition of the capital works under S.70-110 is taken to occur between unrelated third parties.
In contrast to the above, if a developer ceases holding trading stock by disposing of it to a third party (e.g., a family member), this constitutes a disposal of trading stock outside the ordinary course of business and S.70-90 will apply. Under this provision, the developer is taken to have received market value proceeds on the day of disposal, which must be included in assessable income.
Note that, had the developer had the foresight to hold the property as a capital asset rather than as trading stock from the outset (or to cease holding the property as an item of trading stock for some time prior to the transfer to the family member, such that S.70-110 applies), then S.70-90 would not apply and the transaction would generally be taxed on capital account. In this case, the CGT general discount may apply, depending on the entity involved and whether the 12-month ownership period requirement is satisfied. It is recommended that property developers consider these types of issues up-front to avoid costly tax imposts.