As a property development activity can I claim the capital gains tax discount?
Property development is exciting. Healthy profits can be made when undertaking property development.
The tax treatment of these profits from property development will be different to just hold property as an investment. Not every activity to do with property can receive the CGT discount. There are a series of tests and cases that define if your activity will classify you as a property developer for tax purposes
Property developer – the ATO look at the facts
If you are classified as a “property developer “ the Income from the sale of the developed property, will be treated as ordinary income. Tax will be levied at your marginal rate on the profit.
To be classified as a “property developer” it will be based on evidence and facts. This may include the level of activity, your finance documents, how you go about it, and what happens with the finished product.
One thing is for certain a property developer is taxed at marginal rates (assuming a sole trader):
The general capital gains discount will not be able to be used in these circumstances.
A property developer enhances a property to profit from the development activity. Taxpayers that undertake this activity type are referred to as “property developers”. The tax law considers profits to be subject to income tax and no capital gains tax.
Property investing has different tax implications.
A property investor typically is someone who will be just realising a capital asset. Property used for investment purposes will often derive earnings from the asset prior to the sale. Earnings may be rent or no income if vacant land is held for a long while. An investor can claim the capital gains tax 50% discount. This discount effectively halves the tax payable.
Don’t get caught out with taxes !
When a property is disposed of, in most cases there will be tax implications.
If your property is sold as part of the ordinary course of a business, the proceeds from the sale will be declared as assessable income. The sale of new residential property is subject to GST if sold within 5 years of construction. The GST will need to be remitted at settlement. contact us if you need help on this.
Property development has cashflow traps . The big traps are tax and GST issues . Plan for GST tax now, Do so before you dig your first hole in the ground, . A plan will give you an understanding of the true profit.Geoff Gartly CA and renowned property developer tax adviser
Property development is complex so get the right advice!
Geoff has had experience in property development. He advises and presenting in the areas of GST and capital gains tax for real estate and property. Having undertaken a development with joint venture partners, Geoff understands how tax and other traps can impact on profit. Apart from assisting clients to understand their tax obligations in this area. He also professionally presents to professionals on the subject of property development taxes.
Property development is a complex area. We are happy to have an initial discussion to outline your taxation direction for property taxes. Setting up the right structure is important. And what strategy is what you are embarking on.
Take the time to set a property development plan. Your plan should include the structure and taxes that may be incurred as a property developer.