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SMSF how much can I borrow? How to choose the right ownership structure for your investment property. Latest news:. Despite this, in some cases it may be beneficial for the landowner to make a market value election to ensure that as much of the profit from the project is taxed under the capital gains tax provisions instead of the trading stock provisions. A capital loss arises if the cost base exceeds the market value. Where land ceases to be held for the purpose of sale in the ordinary course of business, the landowner is treated as having sold the land for its cost and to have reacquired it for the same amount.
In this case the trading stock provisions stop applying to the land. The application of the trading stock provisions depends on whether a property development or land trading business is being carried on, which is a question of fact. The ATO considers that the following factors are relevant:. The application of the trading stock provisions may not be an optimal tax outcome for the landowner since among other things deductions for acquisition and development costs are deferred until the land is sold.
Tax structuring involves taking steps to minimise the likelihood that the landowner is carrying on a property development or land trading business. The landowner may consider taking a very passive role in the project by engaging a developer to undertake the project, including obtaining approvals and finance, project management, engagement of contractors, marketing and sales.
The development agreement would need careful legal drafting to minimise the involvement of the landowner. If the landowner and developer receive income jointly, this creates a partnership for tax purposes.
To counter this, the development agreement would need careful legal drafting to provide among other things that the proceeds of the project are derived by the landowner and the developer's return is a fee for services. The ATO takes the view that it is usually, but not always, necessary that the purpose of profit making exists at the time of acquiring the land. Also, it is not necessary that the profit is derived in the manner originally intended.
In many cases, the application of this basis of assessment will turn on whether the landowner is carrying out a business operation or commercial transaction. Again this is a question of fact. If the profit is made in the course of carrying on a business, it is likely that the trading stock provisions will apply. According to the ATO, some matters which may be relevant in considering whether a transaction amounts to a business operation or commercial transaction are:.
Income tax is levied on the profit that is derived by the landowner from the sale of the land. This means that similar to the trading stock provisions, deductions for acquisition and development costs are deferred until the land is sold. There is little case law on the methodology for determining profit.
The application of these provisions may not be an optimal tax outcome for the landowner. Tax structuring involves taking steps to ensure that the landowner is not carrying on a business operation or commercial transaction. Again it may be beneficial for the landowner to consider taking a very passive role in the project.
The profit will not be assessable as income under the trading stock provisions or as a profit making scheme if it arises from the mere realisation of the land, even in an enterprising way. For such projects the capital gains tax provisions will have exclusive application. The application of the capital gains tax provisions will be advantageous where:.
The capital gain is equal to the difference between the capital proceeds from the sale of the land and its cost base. The cost base generally includes the acquisition cost of the land, certain incidental costs incurred by the landowner in acquiring or selling the land such as stamp duty and professional fees, capital expenditure on improvements and costs of owing the land such as interest on money to acquire the land.
Expenditure that has been or can be deductible is generally excluded from the cost base.