[Tax] Is a display model home immediately deductible for income tax purposes? A new court case shows...

Our property developer clients often ask: Is the construction of a temporary display model home on land of a revenue, not capital, nature for income tax purposes? If so, the temporary fully expensing measures in Subdiv 40-BB of ITAA 1997 would allow an instant write-off when other conditions are also met.

1. Court case: Masterion Corporation Holding Co Pty Ltd and FCT

The Administrative Review Tribunal (ART) has disagreed with ATO's view that the company's expenditure on the construction of the display model homes was on capital account and was not deductible under s.8-1 of ITAA 1997, as the ATO's position regarded the display model homes as "buildings" that were not "plant". Therefore, Div. 43 of ITAA 1997 (capital works) applies to it instead of Div. 40 of ITAA 1997 (capital allowances). If they were "plant", subdiv. 40-BB of ITAA 1997 would apply.

Rather, the ART has held that it was of a revenue nature and so was deductible for income tax purposes as a general deduction under s. 8-1 of ITAA 1997. The expenditure was a marketing expense of a revenue nature.

2. The rationale of the court

The key takeaway from this case is that the temporary display model home could not be lived in and was always intended to be destroyed and/or replaced with updated designs once the previous design was no longer marketable. The display model home is like a mock-up, which would need to be destroyed, or the display model home was unlettable.

The ART have the following points:

• the purpose or object of Masterton’s expenditure in constructing the temporary display model homes was to advertise and market Masterton’s longstanding business of building and selling residential homes. Accordingly, the marketing expense, even if large and even if one off, was prima facie on revenue account;

• Masterton’s long-standing core business was as a contract builder of residential homes;

• Each display model home merely marketed the latest design to customers until it was replaced by a new design;

• The expenditure on construction of the display model homes did not enlarge the business structure of Masterton to build and sell homes. This was because Masterton did not alter or add to its structure or capacitycapacity, such as by acquiring assets or entering a new market. The display model home expenses were incurred as part of the continuous process by which Masterton operated to increase its ordinary sales and obtain regular returns by means of regular outlay, the difference between which represented profit or loss;

• its outlays had been recurrent and continuous over a significant time as part of an established business. The marketing outlays in terms of construction costs were, in other words, a gradual expense, over time, that had proved to be very successful as part of Masterton’s overall advertising and marketing strategy. The evidence established that not one display model home was made once and for all, but they were updated to meet a continuous demand. The outlay on display model homes was recurrent, repeated or continual over many decades.

Source: Masterton Corporation Holding Co Pty Ltd and FCT [2026] ARTA 160, National Australia Bank Ltd v FCT [1997] FCA 1394.