Accounting for developments in Discretionary Trusts

Hi all,

I have a general question regarding funding and developing through a discretionary trust. Assume I lend money to the trust to purchase a vacant property to develop into a few units. My understanding is that this property is held as trading stock and most costs relating to it are capitalised i.e. acquisition costs, development costs etc. There are some that are expensed as holding costs like council rates, water, trust operational costs etc.

Questions are:
1) Is it correct to expense and not capitalise council rates, water, electricity etc
2) Is interest expense capitalised?
3) As the trust is making a loss until the sale of the units, what happens in the accounts and tax returns assuming the liabilities exceed the assets? I am aware the loss needs to be carried forward but if this development is 100% funded by debt and it makes a loss, the liabilities will exceed assets until the units are sold.

Thanks.

 

Is the trust conducting a business?

if so the second limb of s8-1 ITAA97 should apply to make the expenses deductible.

If it is an isolated transaction the deductions may not be available until the sale.

The trustee should seek legal and tax advice.

 

Yep - A lot of maybes. Then throw in GST to the mix. Is the deferred/ capitalised/ trading stock incl or Ex-GST ? Or both !!

3). Your accounting knowledge is not correct. Makes zero difference. A balance sheet does not need to reflect fair market value excepting when property being held is trading stock - and then you would be insane to reflect fair market value at year end. A profit / loss is determined when sale occurs. At that time profit (assuming its revenue) is recognised.