'Hot' property markets in a number of states have bought the issue of the calculation of taxable profits into focus.
It is well established by decisions in cases such as Raymor and St Hubert's Island that property held for development and sale is trading stock. This applies to both the small developer subdividing a residential lot and the large broad acre developers.
The question that is often asked is what expenditure incurred on trading stock is an allowable deduction and therefore provides immediate tax benefits and what expenditure forms part of the cost of the trading stock.
Taxation Determination TD 92/132 considers the question; if land is trading stock, do related interest costs, council rates and land taxes, form part of the cost price? The determination states that if land is acquired by a business as trading stock, interest, council rates and land tax incurred on and after the acquisition of the land do not form part of the cost price 'of trading stock.'. These costs are incurred in holding the land whether or not it is subject to any future development.
Provided the requirements of the Act are met, related interest, council rates and land tax are deductible in the year in which they are incurred. While draft ruling TR 95/D15 was subsequently withdrawn following a favourable court decision it provides further insight into the Commissioner of Taxation's view on this matter. The draft ruling stated that the following costs would be treated as outlined:
The following holding costs do not form part of the cost price of the trading stock and are deductible ... in the year they are incurred:
- Interest on funds borrowed to acquire the land
- Rates and land tax
- Marketing, advertising and selling expenses.
The following development costs are absorbed into the cost price of trading stock:
- Land acquisition
- Professional fees for design work, including drafting, architectural, engineering and surveying
- Council application fees for the subdivision
- Contribution to the council for off-site upgrading of sewerage works
- Construction of roads.
The following costs form part of the cost price of the trading stock where they are clearly identified with the development of the specific project. Otherwise these costs are deductible ... in the year they are incurred, but are not reflected in the cost price of trading stock:
- Salary and wages to working directors
- Motor vehicle expenses
- Travelling expenses
- Telephone expenses
- Office expenses
- Accounting fees
- Printing and stationery expenses.
The issue may, on first consideration, appear to merely be one of timing, but in a time of changing tax rates and with the potential to take advantage of the old adage, ''tax deferred is tax saved'', the matter warrants close consideration when preparing taxation returns. This takes on even greater importance when the accounting treatment of such expenditure may differ from the taxation treatment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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