Trading stock - external costs

Are costs incurred by the taxpayer in order to gain development approval for residential units, part of the cost of trading stock under Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The costs incurred by the taxpayer in order to gain development approval for residential units are part of the cost of trading stock under Division 70 of the ITAA 1997.

The taxpayer is in the business of property development.

The taxpayer acquired an area for the purpose of erecting residential units.

In order to gain the necessary development approval the taxpayer agreed to redevelop existing facilities in an adjacent area. These costs were not part of the cost of acquisition of the area for development but were a cost incurred in gaining the development approval.

Division 70 of the ITAA 1997 deals with tax accounting for trading stock. Section 70-10 of the ITAA 1997 defines 'trading stock' to mean 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and livestock'.

The area acquired for development into residential units is analogous to broadacre land and forms part of the taxpayer's trading stock ( Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452). Individual articles of trading stock can be valued when they become identifiable (for example, when the Strata Plan is registered, see Barina Corporation Limited v. FC of T (1985) 4 NSWLR 96; 85 ATC 4847; (1985) 17 ATR 134).

In the decision of Federal Commissioner of Taxation v. Kurts Development Ltd (1998) 86 FCR 337; (1998) 39 ATR 493; 98 ATC 4877 ( Kurts Development ), infrastructure and external costs were allocated to the value of trading stock. In discussing the allocation of external costs, the court in Kurts Development used a 'but for' test. In that case the question was whether the external costs were properly characterised as part of the cost price of the individual subdivided lots. They were all expenses which had to be incurred in order to create the individual subdivided lots and, but for that expenditure, those lots would not have been created. For that reason the external costs were also part of the cost price of the individual lots.

All of the costs incurred by the taxpayer in acquiring their trading stock are to be regarded as part of the cost price of that trading stock. This includes both the direct costs of the area acquired and the costs of the development of that area. In the taxpayer's circumstances these development costs also include the cost of gaining the development approval. As a condition of gaining that development approval the taxpayer incurred costs in redeveloping the adjacent area. These costs form part of the development costs and are therefore part of the cost of the trading stock.

Accordingly, the costs of obtaining development approval by the taxpayer are part of the cost of the taxpayer's trading stock for the purposes of Division 70 of the ITAA 1997.