Trading Stock - subdivision of farm land assessable as ordinary income and valuation of land

Is land that was originally acquired and used for farming purposes and later ventured into a business of subdivision, development and sale, considered to be trading stock under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the land has become trading stock under section 70-30 of the ITAA 1997. Under subsection 70-30(1) of the ITAA 1997, the taxpayer can elect to value the land at its cost or its market value just before it became trading stock.

The taxpayer is a company involved in farming and investment activities. Based on the taxpayer's individual facts, it has been determined that the taxpayer has ventured land that it has held for many years into the business of subdivision, development and sale. Through its course of actions, the taxpayer has experienced a genuine change of asset purpose and not a mere realisation of capital. The proceeds received from the subdivision and sale of the land are assessable under section 6-5 of the ITAA 1997.

Section 70-10 of the ITAA 1997 discusses the meaning of trading stock. It states: Trading stock includes: 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 Supplementary Explanatory Memorandum for the Tax Law Improvement Bill 1997 explains that the definition of 'trading stock', which was altered by the Tax Law Improvement Act 1997 was changed from a test based on when an asset is acquired to a test determined according to an asset's current use . This was changed because under the Income Tax Assessment Act 1936 definition of 'trading stock', some assets would always stay trading stock if they were first acquired for that purpose. Therefore, the definition was changed to give effect to section 70-30 of the ITAA 1997, which was also inserted by the Tax Law Improvement Act 1997 .

Subsection 70-30(1) of the ITAA 1997 states: If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if: just before it became trading stock, you had sold the item to someone else (at arm's length) for whichever of these amounts you elect: its cost (as worked out under subsection (3) or (4)); its market value just before it became trading stock; and you had immediately bought it back for the same amount.

The proceeds received from the subdivision and sale of the land are assessable as income under ordinary concepts. Therefore, the taxpayer is holding the residential lots in the ordinary course of a business of development, subdivision, and sale and not for use in an isolated profit making activity (in which case would be assessed under section 15-15 of the ITAA 1997).

It should be noted that the Supplementary Explanatory Memorandum for the Tax Law Improvement Bill 1997 clarifies that the expression 'in the ordinary course of a business' was added into the amended definition of 'trading stock' with effect from 1 July 1997 to ensure that merely holding an asset for manufacture, sale or exchange will not make it trading stock. If a taxpayer is assessable under section 15-15 of the ITAA 1997 as undertaking an isolated profit making venture, the land will not be trading stock because it will not satisfy the definition of trading stock in section 70-10, which requires the sale to be 'in the ordinary course of business'.

Accordingly, the taxpayer will use section 70-30 of the ITAA 1997 for valuation purposes, because the residential lots satisfy the definition of 'trading stock' in the ITAA 1997. The taxpayer can elect whether to value the asset at cost or market value at the time of conversion.