Is your property development considered an income-generating business?

When would you be considered to be operating a business of property development? What difference does it make?

Your property development is considered to be a business where you have a history of property development. If you are considering investing in your first property development, that is most likely to be considered a mere realisation or a profit-making transaction, as discussed in my previous blog. However, if you are planning your third or fourth development, it is more likely to be seen as a regular business activity. As a result, you will be required to account for transactions relating to your property development on the revenue account.

In these circumstances, the land involved in these business transactions will be considered trading stock, not unlike coffee supplies for a café or clothing for a clothing retailer. For example, the café business sold $100,000 in coffee to its customers and the cost of the coffee for those sales was $25,000. The $25,000 of cost is a deductible expense. The same applies to land. If you sold land for $500,000 and the cost of that land was $400,000, the cost is deductible as an expense of trading stock in the financial year that the sale takes place.

So how can you know whether an isolated transaction would be considered a business operation or commercial transaction for a profit-making purpose? The ATO will consider the following factors:

  • The nature of the entity undertaking the operation or
  • The nature and scale of other activities undertaken by the taxpayer.
  • The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained.
  • The nature, scale and complexity of the operation or transaction.
  • The manner in which the operation or transaction was entered into or carried out.
  • The nature of any connection between the relevant taxpayer and any other party to the operation or transaction.
  • If the transaction involves the acquisition and disposal of property, the nature of that property.
  • The timing of the transaction or the various steps in the transaction.

What does this mean for you and your property development?

If the ATO considers you to be conducting a business of property development, then your profit from such activities will be taxed on the revenue account, in the same way as profit-making transactions (as explained earlier). Your profit will be included in the tax return of the entity that is conducting the business and taxed accordingly.

Why is this an issue?

It is an issue because it means that the ATO will not allow you access to any CGT concessions and the current CGT concessions can be significant.

Whilst that might not be ideal for you, the important thing to consider is understanding how your property development will be treated and planning for that accordingly. Too many developers have believed that they will end up with a nice “pot of gold” at the end of the project, only to find out that the ATO takes a big chunk of the gold.

If you are about to undertake a development or have already commenced one and would like to understand the implications better, do not hesitate to contact us.

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Tony Dimitriadis
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