Real-Life Example: Transitioning Property from Trading Stock
Let's delve into Jason's scenario to understand how property transitioning impacts taxes:
1. Jason's Situation: Jason, a property developer, builds three townhouses for sale. Facing sales challenges, he decides to keep one for personal use, letting his son live there.
2. Tax Assessment: When Jason removes the townhouse from the market, he's assessed on its cost, akin to proceeds from selling trading stock. Simultaneously, he claims a deduction for the same amount due to reduced stock on hand. This makes the transaction 'tax neutral' for Jason.
3. Tax Tip: Flexibility in Business vs. Profit-Making Schemes: Trading stock rules allow taxpayers to shift property purpose. For instance, switching from trading stock to rental (a capital asset) is facilitated by statutory provisions. The ATO generally accepts genuine changes of intention, avoiding challenges. However, properties initially intended for profit-making schemes may face stricter scrutiny. If such a property shifts to rental purposes, eventual profits may still be taxed under S.6-5 as part of a profit-making scheme.
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