Development profit retained in stock

Is it possible (by way of legal accounting treatment) to retain untaxed profits from developments in stock. I'll use simple numbers by way of hypothetical (albeit fairly real) numbers.
Land cost $1m
Build cost for 3 townhouses $2m
Total cost of development therefore is $3m
The three townhouses are worth $1.5m each (for simplicity for this example I am ignoring GST)
I sell two of the three townhouses for $3m and I keep the other one in perpetuity (so I don't care what the cost base is).
So, I have spent $3m. I have revenue of $3m. I have paper profit of zero. I happen to own a townhouse that in todays money is worth $1.5m that I will never sell.
Do I pay tax on my zero profit? I am told that the ATO look at what each townhouse cost to build and then tax based on that. Is this really the case? Why if I spent $3m and made $3m in sales should any tax be paid?
Yes, if I foolishly sell the final townhouse at any point I am taxed on the full sale price, that is a decision I wish to be able to make, not be told I pay tax even when my spend and revenue are the same number!
Thanks in advance

 

As much as I would like to say yes it's possible I am pretty sure everything is pro-ratad, ie all costs are divided by percentage depending on differences between build/land sizes

 

I do t think it is possible but there are ways to reduce the tax with timing strategies

 

I highly doubt that's how accounting works but I ain't no accountant.

 

Sorry mate, you don't get a deduction for costs tied up as 'trading stock' as another poster mentioned, it's all prorata'd, usually as per the land sizes of the subdivision.

Simplistic example:
3mil cost for 3 townhouses, 2 settled for 1.5mil each = 1mil taxable profit (ignoring holding costs), with stock on hand valued at cost of 1mil.

If you keep the townhouse you complicate things a fair bit.

1. If you have been claiming gst on the entire development cost you may need to go through the process of a div129 gst adjustment.
2. You may be unable to close down all entities involved in the development
3. If you plan to live there and you leave the property in the development entity, you may not be able to access the main residence exemption.

 

@Mike A has some strategies around this, not sure if he would want to share publicly though.

 

Definitely interested in hearing it. Although I don't really see how it's possible unless you fudge the numbers to skew the development costs.

 

The first issue is what type of developmnet profit has been incurred. Is it even "trading stock" ? Or merely ordinary income arising from a sale event. ie isolated profit making. Trading stock cant become a CGT asset either. You certainly cant defer profits. No. There could even be tax avoidance concerns in attemting to do so by influencing the costs on the one being retained. This is why the ATO target GST reviews of property sales- to detect such issues. Its a high risk review activity. The cost of each sale is offset against its sale proceeds (net of GST) to determine gross profit and the ATO expects reasonable apportionment and cost allocation. The timing of events may be when contracted or settled as the case may be but isnt a choice. Larger developmnet entities may spread their profit on sales in other ways and that is a project costing accounting issue but it is very rare to be honest.

The one that is being retained will need a adjustmnet if its portion of GST on build costs was claimed and this GST credit will erode and end by 4 years to affect the costbase of the property. If continually rented for 5 yaers no GST may be payable on sale HOWEVER the sale is still not a CGT asset. All you will achieve is delaying profit on sale for that lot under ordinary principles.

 

no fudging and strategy has been confirmed with HWL Ebsworth.

the strategy is discussed and implemented with existing clients only.

 

Thanks all for your replies. Paul, to your comments, certainly not looking to avoid tax or fudge cost base etc. My question was more of a simple one around why I should pay tax on profit if profit has not been made. I don't see any other industry where this is the case.
Lets say company A makes widgets. In a year it spends $1m to make 1 million widgets. The widgets sell for $2 each. So they cost a dollar to make and they sell for $2. Unfortunately the widgets are crap and company A only sells half their stock. You guessed it, their revenue ($1m) is the same as their costs ($1m). Do they pay tax, no, there is no profit. The ATO don't look through the books and say the marginal cost of a widget is a $1 and you sold them for $2, therefore we want some tax payable. No, they see the company spent $1m, earned $1m (in the same tax year), therefore no profit = no tax.
Why is what I do any different? More importantly, why can I not choose to account in the same manner?
If I finally sell my final townhouse, or if company A sells all its widgets the next financial year, then yes, there is profit so tax is payable. I would pay tax on the full amount of the sale price as there is no cost base, so be it, that is my problem. If I run a company that spent the same as it makes I fail to see what profit exists that can be taxable.
My question was therefore, can I choose to account (legitimately) and pay tax on profit (revenue minus expenditure) per every other industry?

 

that’s exactly what happens. The business says at the end of the year I have stock that cost me $500k on hand so those costs get taken out of cost of sales and recorded as an asset. This, you pay takes on the $500k net profit (sales less cost of goods sold).

I would have thought your only flexibility would be around timing and apportionment of costs etc.

 

If the land is trading stock there are options, but if a developer retains trading stock it might go from revenue to capital account which creates further tax issues with a deemed disposal.