Tax implications for property
developers and investors
Michael Bennett CTA
13 Wentworth Selborne Chambers
(02) 8915 5111
2013 Tax Implications Property Paper.docx (Printed 14 August 2013 - 7:21 am) Page 1
TABLE OF CONTENTS
1. The income tax regimes applicable to property transactions ................................................ 1
2. Land held as trading stock ........................................................................................................ 2
3. Land as a revenue asset ............................................................................................................. 7
4. Land as a Capital Gains Tax Asset ........................................................................................ 10
5. Characterisation of a Company for Taxation Purposes ....................................................... 12
6. Characterisation of a Trust for Taxation Purposes .............................................................. 13
7. Specific Issue relating to trusts - CPT Custodians case ......................................................... 14
8. Partnership for Tax Purposes ................................................................................................. 17
9. Interest Deductibility ............................................................................................................... 18
2013 Tax Implications Property Paper.docx (Printed 14 August 2013 - 7:21 am) Page 1
1. The income tax regimes applicable to property transactions
1.1 The income tax consequences surrounding dealings with property may be subject to
assessment under a number of different parts of the tax law. The result is that dealings
in property may have a number of different taxation consequences flowing to vendors
of real property.
1.2 Identifying the taxing regime is mostly dependent on the determination of two issues,
1.2.1 the characterisation of the transaction; and
1.2.2 the profile of the taxpayer in relation to the transaction.
1.3 The taxing regime that may apply in the context of a property transaction can be
divided into three possibilities, being:
Capital as a gain on the disposal of a CGT asset.1
Revenue as a disposal of trading stock, where land is held for sale
in the ordinary course of a taxpayer’s business.2
as part of a profit-making scheme.3
1.4 In broad terms, if the asset (i.e. the land) disposed of is characterised as an item of
‘trading stock’ or a ‘revenue asset’, then its disposal consideration it will be subject to
income tax (being on ‘revenue account’). However, if the asset is a ‘CGT asset’, then
any gain or loss on disposal will be subject to the capital gains tax (i.e. CGT)
provisions. The determination of the appropriate taxing regime depends on many
factors and is a question of fact. Broadly, the characterisation of the three possibilities
Account Description Taxation Effect
Capital Capital account ‘Mere realisation’ of an investment in land
Trading stock Land sold as part of a property development business,
where the property is being held for the purpose of re-sale
Revenue asset Land is sold as part of an isolated or ‘one-off’ transaction.
The transaction has been entered into with a profit-making
purpose, and in a sufficiently commercial / business-like
1 Section 6-10 of Income Tax Assessment Act 1997 (Cth) (the ‘1997 Act’) as statutory income (via Section 102-5
and Division 104 generally of the 1997 Act).
2 Division 70 of the 1997 Act, see Section 70-80 where land sold in ordinary course of taxpayer’s business, gross
receipts assessable as ordinary income under Section 6-5.
3 Section 6-5 of 1997 Act as ordinary income, Section 6-10 (via Section 15-15 or Section 25A of the Income Tax
Assessment Act 1936 (Cth) (the ‘1936 Act’)) as statutory income.
Michael Bennett – Tax Implications of Property Developing and Investing Page 2
2. Land held as trading stock
Overview: definition of ‘trading stock’
2.1 In the event that property is sold as part of a property development business, then the
property will be subject to the trading stock provisions (Division 70 of the 1997 Act).
The issue is therefore whether your activities amount to the carrying on of a property
2.2 Although not extremely useful, the term ‘business’ is defined in section 995-1 of the
1997 Act as including ‘… any profession, trade, employment, vocation or calling, but
not occupation as an employee…’. Regard needs to be given to the judicial
interpretation of the term. Ascertaining whether a business is being carried on is a
question of fact (Ferguson v FC of T (1979) 9 ATR 873).
2.3 Section 70-10 of the 1997 Act provides a definition of ‘trading stock’, as including:
‘Anything produced, manufactured or acquired that is held for purposes of
manufacture, sale or exchange in the ordinary course of a business’.
2.4 As a result, taxpayers that are not carrying on a business of property development will
not hold property as trading stock. The High Court upheld this view in the FC of T v St
Hubert’s Island Pty Limited 78 ATC 4104, where it was held that land would
constitute trading stock if it has been acquired for the purpose of resale - including
land that is purchased for the purpose of subdivision, development and resale.
2.5 Further, the property must not merely be held for the purpose of manufacture, sale or
exchange by a business. Rather, it must be held for the purpose of manufacture, sale or
exchange in the ordinary course of a taxpayer’s business.
Holding land for purpose of resale – land originally acquired as trading stock
2.6 Before land will be considered trading stock, it must be held for sale in the ‘ordinary
course of business’. The holding of land as trading stock involves the taxpayer having
dispositive power in relation to the land (Sutton Motors (Chullora) Wholesale Pty
Limited 85 ATC 4398). Where the taxpayer has title to the land in question, this
would be sufficient (in the context of the trading stock provisions) to arise when the
contract for purchase of the land settles (Gasparin v FC of T 94 ATC 4280).
2.7 Broadly, virgin land will constitute trading stock in globo even before it is converted
into a subdivided and improved condition for sale (FC of T v St. Hubert’s Island Pty
Limited 78 ATAC 4104). In globo trading stock will become converted into
individual articles of trading stock upon being converted into subdivided and
marketable components, e.g. when the plan of subdivision is registered (Barina
Corporation v FC of T 85 ATC 4847 and Kurts Developments Limited 98 ATC 4847).
Holding land for purpose of resale – land not originally acquired as trading stock
2.8 While land may not be acquired for resale originally, it may subsequently be held for
such purposes – i.e. be held in the ordinary course of a business, and therefore be
characterised as an item of trading stock.
2.9 In such situations, it is the use or intention relating to land that has changed – resulting
in a change in it’s taxation characteristic from, for example, a CGT asset to an item of
Michael Bennett – Tax Implications of Property Developing and Investing Page 3
2.10 Section 70-30 of the 1997 Act deals with this situation, and provides that in such
cases, the taxpayer holding the land will be deemed to have:
2.10.1 sold the land for its ‘market value’ or ‘cost’ (the taxpayer may elect which
value to use); and
2.10.2 immediately reacquired the land for the same amount.
2.11 The value elected by the taxpayer then becomes the property’s cost for trading stock
purposes. The election must be made by the time of lodgement of the income tax
return for the income year in which the item starts to be held as trading stock.
2.12 However, if the election is not made by the required time, because the taxpayer
subsequently realises they started to hold the item as trading stock, the election must
be made as soon as practicable after the land has changed its characteristic.
2.13 Further, the Commissioner has a discretion to allow a taxpayer to make a later election
(subsection 70-30(2) of the 1997 Act).
2.14 ‘Cost’ is the value the land would it would have been, calculated as if it had it been
acquired as trading stock.
2.15 If cost is elected, the deemed disposal will not give rise to any amount of tax payable
by virtue of the CGT provisions. As a result, there are no negative cash flow
consequences for the taxpayer (subsection 118-25(2) of the 1997 Act).
Market value election
2.16 In the event that a market value election is made, the deemed disposal and reacquisition
under Section 70-30 of the 1997 Act may have CGT implications. The
result may be that there is an income tax liability for the taxpayer, notwithstanding
that no actual proceeds are received.
2.17 Specifically, any capital gain will be any difference between the property’s market
value and cost base (refer to Section 104-220 of the 1997 Act - CGT event K6).
2.18 The Commissioner of Taxation, in Taxation Determination TD 97/1 entitled If land,
originally acquired as a capital asset, is later ventured into a business of development,
subdivision and sale, how is the market value of the land calculated at the time it is
ventured into the business?, considers that the market value of the property is to be
determined having regard to its ‘highest and best use’.
2.19 Such a determination involves a requirement to take into account the land’s potential
usages and the probability of council approval for any potential use. It is assumed that
this would entail a higher value than cost on account of a venture being entered into.
2.20 It should be repeated that in the event that CGT event K4 applies, then the taxpayer
may be subject to a negative cash flow impact, given that an amount of income tax
may become payable notwithstanding that the taxpayer has not actually received any
2.21 However, a market value election may be advantageous, for the following reasons:
2.21.1 the difference between the cost of the property and its market value at the
time of the deemed disposal will be taxed under the CGT regime, and
Michael Bennett – Tax Implications of Property Developing and Investing Page 4
therefore may potentially attract some CGT concessions (e.g., 50% general
discount in Division 115 of the 1997 Act);
2.21.2 the increase in the tax cost of the property will mean that any future gains
subject to tax under the ordinary income provision are reduced; and,
2.21.3 interest referable to borrowings used to fund any income tax liability may be
deductible where connected with the carrying on of a business (Taxation
Ruling IT 2582: Income tax: Deductibility of interest incurred on moneys
borrowed to pay income tax)
Ceasing to hold land for purpose of resale but ownership continues
2.22 In the event that a taxpayer decides that property originally held as trading stock
should be retained for investment or private purposes, section 70-110 of the 1997 Act
will apply to deem the trading stock to be sold for its cost and reacquired for that same
2.23 Section 70-110 of the 1997 Act provides that:
‘If you stop holding an item as trading stock but still own it, you are treated as if:
(a) just before it stopped being trading stock, you had sold it to someone else (at
arm’s length and in the ordinary course of business) for its cost; and
(b) you had immediately bought it back for the same amount.’
2.24 The amount for which the trading stock is notionally sold is assessable income just
like the proceeds of sale of any trading stock. However, given the way in which
trading stock is accounted for, the taxpayer receives a deduction for that same amount
with the result that there is no actual tax liability.
2.25 In the event that the property is held as a CGT asset, then the cost base for the
property will be the deemed purchase price.
2.26 The deemed sale at ‘arms length’ prevents the non-arms length rules contained in
section 70-20 of the 1997 Act applying. Further, as the sale is deemed to be ‘in the
ordinary course of business’ it is also not subject to section 70-90 of the 1997 Act
dealing with assessable income on disposal of trading stock outside the ordinary
course of business.
Bringing to account trading stock acquisitions and disposals under Division 70 of 1997 Act
2.27 Where a business is being carried on and land is being held for the purpose of resale,
the trading stock provisions in Division 70 of the 1997 Act provide the manner in
which outgoings and earnings are treated for income tax purposes.
2.28 Division 70 of the 1997 Act, which is intended to ‘… produce an overall result that …
properly reflects … activities with … trading stock during the income year…’ (section
70-5 of the 1997 Act) provides that:
2.28.1 acquisition and ancillary costs (eg development costs) of purchased trading
stock are an allowable general deduction (section 8-1 of the 1997 Act) in the
year the trading stock is held for sale in the course of a business (section 8-1
and section 70-15 of the 1997 Act);
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2.28.2 the gross consideration received upon disposal of trading stock is assessable
as ordinary income (section 70-80 and section 6-5 of the 1997 Act) upon
being derived (which will be at the date of settlement in respect of trading
stock - Gasparin v FC of T 94 ATC 4280); and
2.28.3 the excess of closing value (section 70-45 of the 1997 Act) of trading stock
on hand at the end of the income year over the opening value (section 70-40
of the 1997 Act) at the start of the income year is assessable (section 70-35
of the 1997 Act);
2.28.4 and conversely, where the opening value of trading stock is greater than the
closing value, the excess is allowable as a deduction (section 70-35 of the
2.29 Deductions for the cost of the trading stock are only available in the income year in
which it is sold. Further, the trading stock regime expressly provides that the cost of
trading stock is not a capital outgoing that could otherwise be denied deductibility
under the general deduction provision (section 70-25 of the 1997 Act).
2.30 As a result, it is important to determine the cost of trading stock, as it is this amount
that is deductible to the taxpayer when the item is sold. Further, a choice must be
made as to how trading stock will be valued for the purposes of the above. It is also
important to note that the closing value of stock for one year becomes the opening
value for the following year.
Valuation of trading stock
2.31 Section 70-45 of the 1997 Act permits three methods for valuing trading stock, being:
2.31.2 market-selling value; or
2.31.3 replacement cost.
2.32 The Commissioner will generally not accept amendment requests that involve
changing valuation methods once an assessment has been issued. However, the
amount of value under the chosen method can be changed.
2.33 When valuing stock according to the ‘cost’ methodology, an important issue to
determine is what is actually included in such a valuation.
2.34 Cost is determined using absorption costing. The Commissioner of Taxation, in
Taxation Ruling IT 2350 entitled Income Tax: Value of trading stock on hand at end
of year: Cost Price: Absorption costing, considered that the following types of items
are included when determining the cost of land as trading stock:
2.34.1 insurance costs in relation to equipment used in construction;
2.34.2 insurance of building being developed;
2.34.3 production supervisory wages (including payroll tax, superannuation,
workers compensation and holiday pay);
2.34.4 depreciation on plant used during construction; and
Michael Bennett – Tax Implications of Property Developing and Investing Page 6
2.34.5 electricity used on-site.
2.35 For a development site, when a parcel of land consists partly of infrastructure land,
which vests in the Crown upon subdivision, the costs of infrastructure land and costs
relating to infrastructure land will be included in the cost of trading stock (FC of T v
Kurts Development Limited v FC of T 98 ATC 4877). These costs are made up of
internal and external infrastructure costs:
2.35.1 internal infrastructure costs include drainage, kerbing, electricity, parks,
roads, sewerage, and telephones; and
2.35.2 external infrastructure costs are those costs that relate to items physically
external to the land of the developer but may be required as a condition of
gaining approval from local council to undertake a subdivision. As the costs
are required in order to gain approval they are incurred in bringing into
existence individual subdivided lots and are therefore included in the cost of
trading stock. Such costs can include upgrading sewerage, water mains or
roads that are adjacent to the taxpayers land or contributions by the taxpayer
in relation to upgrading such items.
2.36 Before registration of a developer’s plan of subdivision creating individual subdivided
lots, infrastructure land and the infrastructure costs relating to the infrastructure land
are part of the cost of the developer’s trading stock consisting of the un-subdivided
land. Upon subdivision, those infrastructure costs become part of the cost of trading
stock consisting of the individual lots (FC of T v Kurts Development Limited v FC of T
98 ATC 4877).
2.37 The costs of holding land are not included in the value of trading stock. Such costs,
including interest, council rates, marketing expenses and land tax incurred on and after
the purchase of land should be deductible in the year they are incurred (Tax
Determination TD 92/132).
Market selling value
2.38 In falling property markets it is feasible that the market value of property may be less
than the value of trading stock at the beginning of the year or from its current year
cost. To secure potential deductions in the year, a taxpayer should ensure that he or
she investigates obtaining a market valuation for the year-end. The valuation of
development and partly developed land requires the usage of the land to be taken into
2.39 Where land is to be ventured into a business of development, subdivision and sale, the
market value of land is to be determined having regard to the ‘highest and best use’
that can be made of the land. The value of land can be enhanced when it becomes
suitable for subdivision (Taxation Determination TD 97/1).
2.40 The land must be valued based on the current state of the land. When looking at
subdivided land each lot will only be valued as a separate item of stock if each block
is individually marketable. Un-subdivided land will be valued as one lot (Barina
Corporation Limited v FC of T 85 ATC 4847).
2.41 The Commissioner in Taxation Determination TD 97/1 provides the following
Michael Bennett – Tax Implications of Property Developing and Investing Page 7
A taxpayer acquired a rural property on which he conducted farming activity.
Some years later, the property is ventured into a business involving the
development and subdivision of the land into residential allotments.
In calculating the net profit on sale of the residential lots, the taxpayer should
take into account an appropriate proportion of the market value of the land
when it was ventured into the business of development, subdivision and sale.
The market value of the land is its value as broad acres but taking into
account its potential for subdivision and the probability of consent being
given for such potential use.
2.42 Where undertaking a market valuation, the choice of who is to undertake a valuation
will depend on the nature of the asset and the taxpayer’s business circumstances – in
particular factors such as:
2.42.1 the value of land versus its cost or opening value;
2.42.2 the complexity of the valuation;
2.42.3 the availability of in-house valuation expertise; and
2.42.4 use of an external valuer.
2.43 It is submitted that where a market value will significantly reduce tax payable, an
independent valuation should be obtained.
2.44 Where a market value is used, it must be the value as at the end of the income year.
This means events subsequent to year-end should not impact on the valuation.
2.45 Replacement cost method values land at the amount the taxpayer would have to pay
for a replacement item in its normal buying market on the last day of the year of
income. For this method to be appropriate, items must be available in the market and
be substantially identical to the replaced items.
2.46 In Parfew Nominees Pty Limited v FC of T (1986) 85 FLR 370 (86 ATC 4673) the
Victorian Supreme Court held that when valuing strata units at year-end, the taxpayer
could not use as replacement cost an estimate of the cost of acquiring a similar block
of land and developing identical strata units. The Court held that it was wholly
unrealistic to postulate a notional rebuilding of a whole development and then to value
the units as part of that development. If valuation at replacement cost were open, it
was held, then the appropriate value would be the selling price of the units.
2.47 The replacement cost method is not generally appropriate to value land as trading
3. Land as a revenue asset
3.1 The disposal of a revenue asset generates ordinary income for the taxpayer.
Generally, a ‘revenue asset’ is one that is purchased with a view to profit upon its
eventual realization (FCT v Whitfords Beach Pty Ltd 82 ATC 4031). It is more than
‘merely’ realised, but it is not held as an item of trading stock.
3.2 The Commissioner of Taxation considered in paragraph 6 of Taxation Ruling TR 92/3
entitled Income tax: profits from isolated transactions that receipts derived from an
Michael Bennett – Tax Implications of Property Developing and Investing Page 8
‘isolated transaction’ would be assessed as ordinary income under section 6-5 of the
1997 Act if:
3.2.1 First - the taxpayer entered into the transaction with a profit-making
3.2.2 Secondly – a profit was made in the course of carrying on a business or in
carrying out a business operation or commercial transaction.
3.3 That is, in Taxation Ruling TR 92/3 the Commissioner of Taxation uses a broad
approach to characterising business gains from isolated transactions. Indeed, at
paragraph 12 the Commissioner asserts that for ‘… a transaction to be characterised as
a business operation or a commercial transaction, it is sufficient if the transaction is
business or commercial in character’.
3.4 However, Hill J in Westfield Ltd v FCT (1991) 21 ATR 1398 considered that a
taxpayer must contemplate the means by which a taxpayer derives profit. In that case,
a taxpayer who acquired an option for the purchase of land with the intention of
designing, constructing, letting and managing a shopping centre was not assessed on
capital account when, before exercising the option, the taxpayer sold the land. The
Commissioner of Taxation assessed the taxpayer on the profit on the basis that it was
income according to ordinary concepts. Justice Hill held that whilst a profit-making
scheme may lack detail at the time of acquisition, the means of achieving the profit
must have been considered by the taxpayer when the option was being acquired.
3.5 At 1406 Hill J observed that:
In a case where the transaction, which gives rise to the profit, is itself a part
of the ordinary business (e.g. a profit on sale of shares made by a share
trader), the identification of the business activity itself will stamp the
transaction as one having a profit-making purpose. Similarly, where the
transaction is an ordinary incident of the business activity of the taxpayer,
albeit not its main business activity, the same can be said. The profit-making
purpose can be inferred from the association of the transaction of purpose
and sale with that business activity.
3.6 Further, at 1408 Hill J concluded that:
… it is difficult to conceive of a case where a taxpayer would be said to have
made a profit from the carrying on, or carrying out, of a profit-making
scheme, where, in the case of a scheme involving the acquisition and resale
of land, there was, at the time of acquisition, no purpose of resale of land,
but only the possibility (present, one may observe, in the case of every
acquisition of land) that the land be resold.
3.7 That is, if the scope of the taxpayer’s business / profit making means is narrowly
defined, the gains may not be assessed on revenue account. Property developers do
well to keep in mind this development tip.
3.8 The carrying on of a business is also not an essential element when considering
whether there is a disposal of a revenue asset. In FC of T v Whitfords Beach Pty Ltd
(1982) 12 ATR 692 at 710 Mason J observed that:
… it is enough that the statutory description that there was a profit-making
undertaking or scheme which exhibited the characteristic of a business deal,
even though it did not amount to the carrying on of a business. If what has
Michael Bennett – Tax Implications of Property Developing and Investing Page 9
happened amounted to no, more than a mere realisation of an asset then it
was not a profit-making undertaking or scheme.
3.9 It seems that profits from an isolated transaction will be treated as assessable income
where a profit-making intention exists when a transaction is first entered into: FC of T
v Myer Emporium 87 ATC 4363. This will typically be when a taxpayer purchases
Is realisation sufficiently business-like? Decisions in Casimaty, McCorkell and Case W59 (Stevenson)
3.10 Where the taxpayer is not engaged in the business of a property developer, but
subsequently sells the land, the manner in which the land is subdivided, developed and
sold will provide the basis for determining whether the transaction amounts to a
business operation or commercial transaction, such that the profit is potentially
assessable as ordinary income.
3.11 It is considered that a more passive role rather than an active role is likely to cause
land development and subsequent sale to be regarded as the mere realisation of a
3.12 McCorkell provides an illustration of a passive role. In McCorkell, the taxpayer
entered into two contractual arrangements. The first arrangement involved a surveyor
and engineer who subcontracted the work on the subdivision. The second
arrangement involved joint estate agents who recommended sale prices and dealt with
all potential purchasers.
3.13 The taxpayer did not contract or deal with the contractors or purchasers and had no
business office or letterhead. The taxpayer had minimal involvement with advertising.
It was thus held that the adoption of a relatively passive role rendered the land
development and sale of the allotments as the realisation of a capital asset.
3.14 In Casimaty, Ryan J held that the purpose for which the property was held remained
unchanged - the taxpayer held land as a capital asset for income-producing purposes.
Ryan J contrasted Casimaty with Whitfords Beach (where the profits made on the sale
of land were held to be ordinary income of the taxpayer), imputing the change of
purpose pertaining to the land to the change in ownership of the company incorporated
by the fishermen to the three property development companies.
3.15 In contrast to the passive role, Case W59 provides an illustration of circumstances
where a taxpayer has adopted an active role in the property development. In Case
W59, the extent to which professional advice was received in respect of the
subdivision and sale of the land was limited to the original planning application.
3.16 The taxpayer alone conducted the remainder of the subdivision and sale of the land.
Thus the taxpayer made all decisions of significance, and directed the entire project.
The taxpayer was directly involved in the negotiations with the local council and
water authority, employed the contractors, and sought – and received – finance.
3.17 Moreover, the taxpayer controlled the sale of the allotments by instructing a number of
local real estate agents to act on his behalf. Whilst no site office was constructed on
the property, the taxpayer utilised a home office to manage the subdivision, including
to maintain the associated accounts and to deal with prospective purchasers.
3.18 The Administrative Appeals Tribunal held that the taxpayer in Case W59 was engaged
in the business of subdividing, developing and selling land as opposed to merely
Michael Bennett – Tax Implications of Property Developing and Investing Page 10
realising the capital asset in the most advantageous way. The decision of the AAT
was affirmed in the Federal Court on appeal by the taxpayer in Stevenson.4
Taxation implications when a property is a revenue asset
3.19 Where an asset is characterized as a ‘revenue asset’, income tax is levied on the
‘profit’ that the taxpayer derives upon sale. The High Court in Whitfords Beach held
that the net profit on the land sales fell within the concept of ‘gross income’ under the
ordinary income provision of section 6-5 of the 1997 Act.
3.20 That is, gains realized on the sale of revenue assets are assessed as ordinary income
under section 6-5 of the 1997 Act and losses incurred on disposal are deductible under
section 8-1 of the 1997 Act.
3.21 Given that gains made on revenue assets are taxed on a profit and loss basis outgoings
are recognised as a cost when the gain is brought to account – with the deduction not
recognised when the asset is initially acquired.
4. Land as a Capital Gains Tax Asset
4.1 When property acquired on or after 20 September 1985 is not held as trading stock of
the taxpayer or otherwise on revenue account, but rather is held on capital account by
the taxpayer, any gain or loss arising upon disposal of the land will be calculated and
assessed under the CGT provisions.
4.2 As stated above, property held by a taxpayer may be characterised as either a:
4.2.1 a revenue asset - on the basis that there is an intention by the taxpayer to
make a profits on the disposal of the property; or
4.2.2 a capital asset - on the basis that the property forms part of the profit
yielding structure of the taxpayer therefore its disposal will be subject to
4.3 Scottish Australian Mining Co Ltd v FC of T (1950) 4 AITR 443 established that a
profit derived from the sale of a capital asset, undertaken in an enterprising manner is
not income according to ordinary concepts. A taxpayer is not assessable on the profits
if the taxpayer does everything possible to realise to the best advantage a capital asset,
and the asset was not initially acquired for the purpose of being eventually disposed at
a profit. At 450-1 Williams J held that:
The crucial question is therefore whether the facts justify the conclusion that
the appellant embarked on …[a profit-making] …business or undertaking or
scheme. The facts would, in my opinion, have to be very strong indeed before
a court could be induced to hold that a company which had not purchased or
otherwise acquired land for the purpose of profit-making by sale was engaged
in a business of selling land and not merely realising it when all that company
had done was to take necessary steps to realise the land to best advantage,
especially land which had been acquired and used for a different purpose
which it was no longer businesslike to carry out.
4 Stevenson v FCT 91 ATC 4475
Michael Bennett – Tax Implications of Property Developing and Investing Page 11
4.4 Land held on capital account will be a CGT asset (section 108-5 of the 1997 Act).
Joint tenants are treated as owning separate CGT assets proportionate to each tenant’s
interest in the CGT asset (section 108-7 of the 1997 Act).
4.5 A disposal of a CGT asset occurs upon the occurrence of a ‘CGT event’. Some of the
relevant CGT Events applicable to property transactions include:
CGT Event Description
CGT event A1 disposal of a CGT asset by a change in beneficial ownership to
CGT event E2 transfer of a CGT asset to a trust
CGT event E4 capital payments from a unit trust to a unit holder
CGT event E5 a beneficiary of a trust becoming entitled to a trust’s CGT asset
CGT event K4 a CGT asset becomes trading stock
4.6 For CGT assets acquired before 21 September 1999 and held for at least 12 months,
the taxpayer can choose to calculate the capital gain based on either:
4.6.1 the indexed cost base (cost base adjusted for the ‘consumer price index’ up
to 30 September 1999); or
4.6.2 by applying the ‘CGT 50% discount’, which is unavailable for companies
(Division 115 of the 1997 Act).
4.7 Where the capital gain is made by a trust, the CGT 50% discount is applied and the
balance distributed to an individual beneficiary, the beneficiary will ‘gross up’ the
distribution apply losses if any then apply the CGT 50% discount to the grossed-up
amount. That is the discount effectively flows from the trust to the beneficiary. A
similar result occurs when the payment passes through a chain of trusts.
4.8 A number of other CGT concessions may apply, such as:
4.8.1 The CGT main residence exemption (Division 118-B of the 1997 Act); and
4.8.2 The CGT small business concessions (Division 152 of the 1997 Act).
4.9 The small business concessions contained in Division 152 of the 1997 Act may
significantly reduce a capital gain made in respect of an ‘active asset’ of a ‘small
4.10 A ‘small business taxpayer’ is one that owns, together with related entities, assets
valued at $6m or less (section 152-15 of the 1997 Act). An ‘active asset’ is an asset
used or held ready for use in a business and, in certain circumstances, includes shares
and trust interests in an entity that holds active assets (section 152-40 of the 1997 Act).
However, an active asset does not include an asset whose main use in the course of
carrying on the business was to derive rent, unless its main use for deriving rent was
only temporary (subsection 152-40(4)(e) of the 1997 Act). This has particular
Michael Bennett – Tax Implications of Property Developing and Investing Page 12
significance for property developers that lease property to increase revenues pending
4.11 The exclusion of assets used to produce rental income effectively limits the
availability of the concessions to property projects used by the taxpayer or a related
entity in a business (eg a factory or shop). Accordingly, the concessions are of limited
5. Characterisation of a Company for Taxation Purposes
5.1 Companies are treated as an entity seperate from its owners (i.e. the shareholders).
As a result, a company is an autonomous taxpayer. Section 4-1 of the 1997 Act
‘Income tax is payable by each individual and company, and by some other
entities.’ [emphasis added]
5.2 Further, item 2 in section 9-1 of the 1997 Act provides that a company that is a body
corporate or an unincorporated body (except a partnership) is required to pay income
5.3 The term ‘company’ is defined in section 995-1 of the 1997 Act as a body corporate or
any other unincorporated association or body of persons, but it does not include a
Taxation Treatment of Companies
5.4 Like other taxpayers, corporate taxpayers pay tax on their taxable income. The taxable
income for a company is calculated in the same way as for other taxpayers – i.e.
‘assessable income’ less ‘allowable deductions’.
5.5 However, corporate taxpayers are subject to modifying rules, such as those applicable
to the calculation of losses and bad debts where there has been a change in ownership
and control of the company, and they may also use ‘concessions’ such as the
Dividends from Companies - Franking Credits
5.6 Subject to the debt/equity rules, shareholders are generally assessed on distributions of
corporate profits when they receive ‘dividends’.
5.7 The ‘imputation system’, has the aim of removing the double taxation of corporate
profits by integrating taxation at both the corporate and shareholder level.
5.8 Under the regime, dividends paid by companies to their shareholders included in the
assessable income of the shareholders and grossed-up to the extent that the company
has paid tax on the profits referable to the dividend payment. After tax has been
calculated on the shareholder’s taxable income, the shareholder obtains a ‘franking
credit’ referable to the tax paid by the company on the profits out of which the
dividends have been paid. The franking credit is equal to the gross-up amount of the
dividend. The practical effect is that the tax paid by the company is imputed to the
Losses of Companies
Michael Bennett – Tax Implications of Property Developing and Investing Page 13
5.9 Given that companies are treated as separate taxpayers from their owners, any losses
incurred in a company cannot be distributed to the shareholders. Rather, they are
retained in the company to be off-set (subject to specific anti-avoidance provisions
regarding carry-forward losses) against future income of the company.
Advantages and Disadvantages of the Company Structure
Income is taxed at the company rate of
Company profits (including those derived
from rental income) are taxed as
dividends when distributed to
Profits cannot be distributed to specific
Companies cannot distribute losses to
shareholders. Any losses must stay within
the company and can only be offset
against company income. This makes it
difficult to maximize the benefits of
Companies cannot gain the 50% discount
for capital gains on assets held for
12 months or more (Division 115 of the
6. Characterisation of a Trust for Taxation Purposes
6.1 The 1936 and 1997 Acts do not provide a definition of ‘trust estate’. However, the
term ‘trust’ is defined in subsection 6(1) of the 1936 Act5 as:
‘… in addition to every person appointed or constituted trustee by acts of
parties, by order, or declaration of a court, or by operation of law, includes
(a) an executor or administrator, guardian, committee, receiver, or
(b) every person having or taking upon himself the administration or
control of income affected by any express or implied trust, or acting
in any fiduciary capacity, or having the possession, control or
management of the income of a person under any legal or other
6.2 The definition of ‘trustee’ is provided in subsection 6(1) of the 1936 Act as:
5 and given the same meaning in the 1997 Act by section 995-1 of that Act.
Michael Bennett – Tax Implications of Property Developing and Investing Page 14
(i) a person who has control over property (whether or not they hold the
property) and who owes a fiduciary duty to another in exercising that control;
(ii) a person under a fiduciary duty, with the duty relating to the administration
or control of the relevant property.
Taxation Treatment of Trusts
6.3 Income referable to trust estates are brought to tax under Division 6 of Part III of the
6.4 Section 97 of the 1936 Act applies to a beneficiary who is not under a legal disability
and who is presently entitled to a share of net income of the trust estate. The
assessable income of an Australian resident beneficiary includes the beneficiary’s
share of the net income of the trust estate. The assessable income of a non-resident
beneficiary includes so much of the beneficiary’s share of net income of the trust as is
attributable to sources in Australia.
6.5 Trusts are partial look through entities for taxation purposes.
6.6 Carry forward losses, for example, are retained within a trust, and cannot be
distributed to beneficiaries. Such carry-forward losses can only be used by a trust in
future income years for the purpose of calculating the net income of the trust estate for
that year – subject to the trust loss provisions within Schedule 2F to the 1936 Act.
Advantages and Disadvantages of the Trust Structure
Distributions from trusts retain their
Trusts are eligible for the Division 115
discount on capital gains.
Profits can be distributed to a wide group
Losses remain in the trust, they are not
To avoid the trustee paying tax at the
highest marginal tax rate beneficiaries
must be made presently entitled to all of
that year’s income.
7. Specific Issue relating to trusts - CPT Custodians case
7.1 One of a number of issues concerning trusts, but one particularly relevant to property
investors or developers, is a beneficiary’s interest in property that is subject to a trust
relationship – as considered by the High Court in CPT Custodians Pty Ltd v
Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2
Holdings Pty Ltd  HCA 53.
Finding in CPT Custodians
7.2 The High Court in CPT Custodians held that for the purposes of the Victorian Land
Tax Act 1958 (Vic), unit holders of a unit trust own a beneficial interest in the trust
Michael Bennett – Tax Implications of Property Developing and Investing Page 15
property, rather than an ownership interest in any particular asset of the unit trust. As
a result, the unit holders were not considered to own the land held by a unit trust. This
is on the basis that the trustee’s (and manager’s) entitlement to the assets of the trust
effectively dilutes, or defeases the unit holder’s entitlements to the assets, income and
capital of the trust.
A trustee’s right to reimbursement – the scope of the right pre-CPT Custodians
7.3 Arguably, the decision of the High Court in CPT Custodians regarding a beneficiary
of a trust only having a residuary entitlement to the assets of a trust was already
authority recognised by past decisions of the High Court.
7.4 Under the general law, as the legal owner of trust property, the trustee is considered to
be personally liable for debts incurred in the course of carrying out the activities of the
trust. However, under the general law, the various trustee legislation,6 and also as
typically provided for in the particular trust deeds, with respect to the debts that a
trustee may become personally liable for, a trustee might seek to:
7.4.1 reimburse itself – i.e. a trustee has a right of indemnity; and / or
7.4.2 pay or discharge out of the trust property (i.e. a right of exoneration) all
expenses properly incurred or expended in or about execution of the trustee’s
trusts or powers.
7.5 In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, the High Court
expressed the view, which had been confirmed in Chief Commissioner of Stamp
Duties v Buckle (1998) 151 ALR 1, that a trustee’s right of indemnity is property –
that is, a right for the benefit of the trustee in the trust fund.
7.6 A trustee’s right of indemnity and exoneration is replicated in legislation. For
example, in New South Wales7 subsection 58(4) of the Trustee Act 1925 (NSW)8
A trustee may reimburse himself or herself, or pay or discharge out of the
trust property all expenses incurred in or about execution of the trustee’s
trusts or powers.
7.7 The High Court explained a trustee’s right of indemnity in Octavo at 367 as follows:
[A trustee] … is entitled to be indemnified against those liabilities from the
trust assets held by him and for the purpose of enforcing the indemnity the
trustee possesses a charge or right of lien over those assets … The charge is
not capable of differential application to certain only of such assets. It
applies to the whole range of trust assets in the trustee’s possession except for
those assets, if any, which under the terms of the trust deed the trustee is not
authorised to use for the purposes of carrying on the business … In such a
case there are then two classes of persons having a beneficial interest in the
trust assets: first, the cestuis que trust, those for whose benefit the business
6 See for example section 59(4) of the Trustee Act 1925 (NSW).
7 And also the Australian Capital Territory.
8 See also: section 72 of the Trusts Act 1936 (QLD); subsection 35(2) of the Trustee Act 1936 (SA); subsection
36(2) of the Trustee Act 1958 (Vic); section 71 of the Trustees Act 1962 (WA); section 26 of the Trustee Act
Michael Bennett – Tax Implications of Property Developing and Investing Page 16
was being carried on; and secondly, the trustee in respect of his right to be
indemnified out of the trust assets against personal liabilities incurred in
the performance of the trust. The latter interest will be preferred to the
former, so that the ceruis que trust are not entitled to call for a distribution of
trust assets which are subject to a charge in favour of the trustee until the
charge has been satisfied … The creditors of the trustee have limited rights
with respect to the trust assets. The assets may not be taken in execution …
but in the event of a trustee’s bankruptcy the creditors will be subrogated to
the beneficial interest enjoyed by the trustee …
7.8 That is, Octavo is authority for the proposition that a trustee’s interest in a trust fund
(e.g. due to its right to indemnity) trumps the right of a beneficiary to the assets
subject of a trust.
7.9 Quoting Scott on Trusts, the Full Court of the High Court observed in Buckle’s case at
Where the trustee acting within his power makes a contract with a third
person in the course of the administration of the trust, although the trustee is
ordinarily personally liable to the third person on the contract, he is entitled
to indemnity out of the trust estate. If he has discharged the liability out of
his individual property, he is entitled to reimbursement; if he has not
discharged it, he is entitled to apply the trust property in discharging it, that
is, he is entitled to exoneration. [emphasis added]
7.10 The right to the beneficiaries interest in the assets held by the trust has been
distinguished between the assets themselves – with the beneficiaries entitled to the
residuary of the trust fund after the trustee’s right to reimbursement or exoneration has
been discharged. In citing the decision in Dodds v Tuke (1884) 25 Ch D 617 at 619,
the Court in Buckle’s Case observed at 13:
‘Until the right to reimbursement or exoneration has been satisfied, ‘it is
impossible to say what the trust fund is’ …. . The entitlement of the
beneficiaries in respect of the assets held by the trustee which constitutes the
‘property’ to which the beneficiaries are entitled in equity is to be
distinguished from the assets themselves. The entitlement of the beneficiaries
is confined to so much of those assets as is available after the liabilities in
question have been discharged or provision has been made for them. To the
extent that the assets held by the trustee are subject to their application to
reimburse or exonerate the trustee, they are not ‘trust assets’ or ‘trust
property’ in the sense that they are held solely upon trusts imposing fiduciary
duties which bind the trustee in favour or the beneficiaries …
7.11 The above statements are consistent with the High Court’s reasoning in CPT
Custodians at  where it was held that:
In the present case, the unsatisfied trustees’ right of indemnity was … an
actual liability …. Until satisfaction of rights of reimbursement or
exoneration, it was impossible to say what the trust fund in question was.
7.12 Given precedent on the issue, the author queries whether there actually has been a
change in the law following the decision in CPT Custodians. Rather, it seems that the
various Chief Commissioners of State Revenue has seized upon the decision in CPT
Custodians to argue that there was been a fundamental shift in the view relating to a
unit holders rights in the trust fund of a trust estate in order to raise extra revenue.
Michael Bennett – Tax Implications of Property Developing and Investing Page 17
8. Partnership for Tax Purposes
8.1 The definition of ‘partnership’ contained in the 1997 Act consists of two limbs, which
8.1.1 an association of persons carrying on business as partners;
8.1.2 an association of persons in receipt of ordinary income or statutory income
jointly. This limb is sufficiently wide to include, for example, a passive coownership
of income producing property.
8.2 A ‘partnership’ for tax law purposes needs to be distinguished from a joint venture.
This is presently an issue in many GST cases.
8.3 The advantages and disadvantages of establishing a partnership are:
Income and losses shared according to
Losses distributed directly to partners.
Capital losses are calculated in the hands
of the individual partners.
Partners who are individuals, trusts or
superannuation funds may receive the
Division 115 discount on capital gains.
Income from property are taxed at the
individual partner’s marginal rate of tax.
Capital gains are calculated directly in the
hands of the individual partners.
Partners are jointly and severally liable
for the partnership debts.
Taxation Treatment of Partnerships
8.4 Section 90 of the 1936 Act defines the ‘net income’ of a partnership as:
‘…the assessable income of the partnership, calculated as if the partnership
were a taxpayer who was a resident, less all allowable deductions except
deductions allowable under section 290-150 or Division 36 of the Income
Tax Assessment Act 1997.’
8.5 That is, the ‘net income’ of a partnership is basically the ‘taxable income’ (ie.
assessable income less allowable deductions) arising from the partnership’s activities.
However, there are two modifications to the application of Australian tax law to the
calculation of a partnership’s net income:
8.5.1 the deduction for contributions to superannuation funds under Section 290-
150 of the 1997 Act is not applicable in calculating a partnership’s ‘net
8.5.2 deductions for tax losses carried forward under Division 36 of the 1997 Act
are not applicable in calculating net income of a partnership. This is because
Michael Bennett – Tax Implications of Property Developing and Investing Page 18
partnership losses are claimed by the individual partners in the year of
income in which the loss was incurred. If the loss is not fully absorbed
against the partner’s other income, then it can be carried forward under the
tax lass carry-forward rules by the individual partners for offset against
future assessable income that they may derive.
8.6 Section 90 of the 1936 Act also defines the term ‘partnership loss’. It provides that:
‘…means the excess (if any) of the allowable deductions, other than
deductions allowable under section 290-150 or Division 36 of the Income Tax
Assessment Act 1997, over the assessable income of the partnership
calculated as if the partnership were a taxpayer who was a resident.’
8.7 The basis for the calculation of a ‘partnership loss’ is similar to that applicable to the
calculation of ‘net income’ except that in a ‘partnership loss’ situation the allowable
deductions exceed the assessable income.
8.8 When the net income or partnership loss is calculated, it is allocated to the individual
partners. Under section 92 of the 1936 Act, it is the partner’s individual interest in the
net income or partnership loss that is taken into account in determining the individual
partner’s taxation position. As such, the allocation of net income or partnership loss is
based on the partners’ interests, and not on the distribution of partnership profits.
8.9 In respect of first limb partnerships, a partner’s individual interest is generally
determined via the partnership agreement. Therefore, for such a partnership the
partners can agree to share income and losses in whatever proportions they choose.
Further, it may be possible, under the partnership agreement, to nominate that
particular partners receive particular items of income.
8.10 The position is different under second limb partnerships. In such situations, the
partner’s individual interest in net income and partnership loss is determined
according to the individual partner’s interest in the property producing the income.
8.11 In Taxation Ruling TR 93/32, the Commissioner of Taxation stated that, for a second
limb partnership, it is the legal interests of the parties in the property which ultimately
determine their individual interests in the net income or partnership loss. However, if
it is established that the equitable interests in the property do not follow the legal
interests, then the equitable interests will be used for the purposes of determining
individual interests in net income or partnership loss.
8.12 Income retains its character (eg. rental income) as it passes through a partnership to
the individual partners9. Further, it may be possible for a partnership to nominate that
particular partners take particular items of income (ie. partners may not be entitled to a
pro rata share of each item of income derived by a partnership)10.
9. Interest Deductibility
9.1 Generally, interest is deductible if it is referable to borrowings to fund business
activities where the loan is used to acquire income producing assets (including capital
assets), or to meet day-to-day expenses. That is, interest costs will be deductible under
9 In Taxation Ruling TR 92/13, the Commissioner accepted that income passing through a trust retains its
character in the hands of a beneficiary. It is submitted that a similar principle must apply to partnerships, as a
partnership is a complete look-through entity.
10 In Taxation Ruling IT 2125, the Commissioner accepted, in relation to prescribed payment system income of a
partnership, that it may be shared differently from other net income of a partnership.
Michael Bennett – Tax Implications of Property Developing and Investing Page 19
section 8-1 of the 1997 Act where they are incurred in gaining or producing assessable
income or carrying on a business to produce such income, provided that the outgoing
is not on capital account.
9.2 The deductibility of interest is determined by looking at the purpose of the loan and
the use to which the loan funds are put. In the event that a loan is used to acquire
capital assets, the interest may still be deductible if it is necessarily incurred for the
purpose of gaining or producing assessable income.
9.3 As a result, if a taxpayer purchases a property which is intended to be rented out, and
is on capital account, any interest referable to borrowings used to acquire the property
will be deductible to the taxpayer on the basis that it has the expectation of deriving
(rental) income from the property;
9.4 The same principle applies if a taxpayer incurs interest on monies borrowed to
purchase land that is a revenue asset or trading stock.
9.5 In NMRSR Ltd v FCT (1998) 38 ATR 308 the Federal Court held that even though a
capital asset acquired by a business may not directly produce income itself, it may
contribute to the efficient operation of the business which produces assessable income,
and therefore, the interest expense associated with that asset should be deductible.
Pre- commencement and post-cessation deductibility of business expenditure
9.6 When carrying on a business involving property transactions, it will be important to
determine deductibility of outgoings. The ‘second limb’ of the general deduction
provision11 provides that losses and outgoings may be deducted from assessable
income to the extent that ‘… it is necessarily incurred in carrying on a business for the
purpose of gaining or producing your assessable income.
9.7 As a result, an important consideration is whether a loss or outgoing is incurred too
soon, or too late after a business activity has commenced / ceased.
(i) Pre-commencement of a business activity
9.8.1 Costs incurred prior to a business commencing (e.g. feasibility studies and
tests) are not considered to be incurred in carrying on a business, and are
therefore not typically deductible (Softwood Pulp and Paper Ltd v FC of T
76 ATC 4439).
9.8.2 Further, costs incurred in establishing a new component of a taxpayer’s
business are also not usually deductible (Griffin Coal Mining Company Ltd v
FC of T 90 ATC 4870).
9.8.3 Expenditure incurred on research and development activities are considered
too preliminary to the carrying on of a business activity to be deductible
(Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438)
(ii) Post – cessation of a business activity
11 Comments will be restricted to cases determined under subsection 8-1(b) of the 1997 Act.
Michael Bennett – Tax Implications of Property Developing and Investing Page 20
9.9.1 Expenditure incurred in selling or winding-up a business is generally not
deductible, as it is not incurred ‘in carrying on a business’ (Pye v FC of T
(1959) 12 ATD 118).
9.9.2 The fact that expenditure is incurred after a business activity ceases does not
automatically mean that it is not deductible.
9.9.3 In determining deductibility in post-cessation situations, it needs to be
determined whether the ‘… occasion of the business outgoing …’ is to be
found in the ’… business operations directed toward the gaining or
production of assessable income …’ (Case 17/96 96 ATC 230).
9.9.4 It needs to be shown that the cessation of the business activities does not
operate to break the nexus between the carrying on of the business and the
incurring of the liability (FC of T v Brown 99 ATC 4600)