ATO Interpretative Decision
ATO ID 2004/439 (Withdrawn)
Derivation of income: pre-completion sales contracts
FOI status: may be released
||This ATO ID is withdrawn as it is no longer necessary. The ATO view featured in this ATO ID is contained in TR 97/15 Income Tax: conditional contracts: derivation of income; allowable deductions; trading stock.
||This document has changed over time. View its history.
Status of this decision: Decision withdrawn 14 July 2017.
|CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.|
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
If a property developer enters into a sales contract prior to completion of construction (known as a pre-completion contract or an off the plan sales contract), are the amounts receivable pursuant to the contract included in assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of entering into that contract?
No. The amounts will only be included in assessable income of the property developer under subsection 6-5 of the ITAA 1997 once all contingencies under the contract cease to exist.
The taxpayer carries on the business of property development and purchased land for the purpose of developing a mixed residential and commercial complex. The taxpayer retained ownership of the property throughout the course of development.
The taxpayer entered into a contract with a builder to construct the entire project. Prior to construction commencing, the taxpayer entered into a number of pre-completion sales contracts for both the residential apartments and commercial complex. Purchasers paid a deposit upon entering into the contract with the balance due at settlement which followed completion of the project.
The project was deemed complete when an occupancy certificate had issued in respect of building completion and a strata plan had been registered.
The land and buildings were trading stock of the property developer.
Reasons for Decision
Subsection 70-80(1) of the ITAA 1997 provides that the proceeds from the disposal of trading stock are to be included in assessable income as ordinary income. Under subsection 6-5(2) of the ITAA 1997 a taxpayer is required to include in assessable income the ordinary income it derives during the income year.
In Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd (1938) 63 CLR 108 (Carden's Case) it was established that the method of accounting for assessable income should be such that it provides a 'substantially correct reflex of the taxpayer's true income'.
Barratt and Others v. Commissioner of Taxation (1992) 36 FCR 222; 92 ATC 4275; (1992) 23 ATR 339 is authority for the proposition that income is derived when there is a present right to receive a quantifiable amount that is not subject to any contingency or defeasibility. In J Rowe and Son Pty Ltd v. Federal Commissioner of Taxation (1971) 124 CLR 421; 71 ATC 4157; (1971)2 ATR 497 the court indicated that income from the sale of stock is derived when the stock is sold and a debt is created.
In Gasparin v. Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1994) 28 ATR 130 ( Gasparin ), the Full Federal Court held that income from the sale of allotments of land, which formed the taxpayer's trading stock, was not derived when the contracts for sale became unconditional. Rather, the income was derived once settlement occurred.
In its judgment, the court referred to the statement of Mason CJ in Sunbird Plaza Proprietary Limited v. Maloney and Anor (1987-1988) 166 CLR 245. In that case, a contract for the sale of a home unit provided for a 10% deposit on exchange of contracts and the balance within 14 days notice of the registration of a building unit plan. Settlement had not taken place and there had been no conveyance when the matter came before the court. His Honour said:
Here the balance of the purchase price was payable 'upon settlement'. Settlement has not taken place and there has been no conveyance of the property being sold. Once this is accepted, the appellant is faced with a daunting task in making good the submission that the respondent guarantors are liable under their joint and several guarantee to pay the balance of the purchase price and interest thereon, notwithstanding the absence of an accrued liability on the part of the purchaser to make the payment.
In Gasparin , the court determined the following:
- the trading stock was real property and the allotments remained registered in the name of the vendors until settlement
- until settlement the vendors had not lost dispositive power and had not ceased to have proprietary interest in the land
- the allotments remained trading stock on hand until each transaction proceeded to the point where a debt accrued due from the purchaser, and
- it was only when all contingencies and uncertainties are satisfied that a debt, being a sum certain, accrued due to the taxpayer and it was at that point that income was derived for the purpose of levying taxation (that is, at settlement).
In this instance, the units making up the mixed residential and commercial complex remain trading stock of the taxpayer until each transaction proceeds to the point where a debt accrues from the purchaser. They remain registered in the name of the taxpayer and it is not until settlement that the taxpayer loses dispositive power and ceases to have any proprietary interest in the property. It is only at settlement, when all contingencies and uncertainties cease to exist, that a debt accrues due to the taxpayer and income is derived for the purposes of levying taxation.
Therefore, the amounts receivable are to be brought to account as assessable income under subsection 6-5(2) of the ITAA 1997 at the time of settlement
Date of decision: 20 May 2004
|Year of income:||Year ended 30 June 2004|
Income Tax Assessment Act 1997
Commissioner of Taxes (SA) v. Executor Trustee and Agency Co of South Australia Ltd
(1938) 63 CLR 108
J Rowe & Son Pty Ltd v. Federal Commissioner of Taxation
(1971) 124 CLR 421
71 ATC 4157
(1971) 2 ATR 497
Sunbird Plaza Pty Ltd v. Maloney
(1988) 77 ALR 205
(1988) 166 CLR 245
(1988) 62 ALJR 195
Barratt v. Commissioner of Taxation
(1992) 36 FCR 222
92 ATC 4275
(1992) 23 ATR 339
Gasparin v. Commissioner of Taxation
(1994) 50 FCR 73
94 ATC 4280
(1994) 28 ATR 130
Related ATO Interpretative Decisions
ATO ID 2004/27
Construction & real estate
Disposal of real estate
Property development industry
Real estate as trading stock
Siebel/TDMS reference number: 4077683; 1-BW6MLJ4
Business line: Small Business/Individual Taxpayers
Date of publication: 28 May 2004
|ATO ID 2004/439 (Withdrawn) history