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The taxation of a ‘profit-making scheme’ (2) - Tax regimes step 1: Calculating the net profit (2)

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TAX TIP – What is meant by ‘market value’?

In TD 97/1, the Commissioner accepts that the “highest and best use” principle must be applied with respect to the market valuation of the relevant land. This principle is premised on the land’s market value being determined with regard to the highest and best use that can be made of the land. This approach requires due weight to be given to the potential land (and, in most instances, the value of land is enhanced when it becomes suitable for subdivision).

How is the total cost apportioned across individual lots?

In the case of a profit-making scheme involving the subdivision of land, the total cost of the development must be apportioned over each lot or title before a profit on each can be determined. 

Costs that are specifically related to an individual lot should be allocated directly to it. Many costs do not fit into this category and must instead be apportioned amongst the relevant blocks on a reasonable basis. Some of the valuation methods that may be considered include the following:

  • Anticipated selling price method, which requires the costs to be apportioned to each lot depending on the proportion that the anticipated selling cost bears to the total anticipated sale proceeds. This is usually the most suitable form of apportionment.
  • Metre frontage, where costs are allocated based on the metre frontage of each block.
  • Area, where costs are allocated on the basis of the total saleable area in the development.
  • Number of lots, where costs are allocated in proportion to the number of lots being developed.

This method is usually only appropriate where all lots (and buildings) are identical.

 

  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
  • Alternatively, you can book an appointment in our live calendar.

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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