There are many tax and legal issues when dealing in the property development space. It can be a potential minefield.
Fortunately, by understanding the lay of the land you will be in a much better position to protect yourself, or to ask your accountant or financial adviser the right questions to prevent you from being caught out by the ATO.
The key issue for property developments is the distinction between capital and revenue. Why? Put simply, there are different tax treatments for each revenue type, and any profits or gains that can be considered capital can receive significant tax concessions as opposed to those that are considered to be revenue.
The tax consequences arising from any property development fall into three categories:
The mere realisation of a capital – refers to the gain you make from a capital asset. If you eventually decide to sell the property that you purchased, held and rented for a period of time (as described above), and there was a profit due to a natural increase in value, this would be considered to be a mere realisation.
An isolated profit-making transaction or scheme – unlike a mere realisation of an asset’s value, a profit-making transaction is one where an asset was purchased with the intent of selling it for profit. This transaction is considered revenue, rather than capital (even if it’s an isolated or one-off transaction).
Income from carrying on a business – your property development is considered to be a business where you have a history of property development (i.e. more than one development).
That is a very brief description of the three main categories, however, you can see that the ATO will look to place your property transactions into one of these categories and tax it accordingly.
We cannot stress enough the importance of understanding the three different transactions BEFORE you commence any property development related activity.
Doing so, we ensure that you have done everything to minimise the tax consequences so you can generate the best possible after-tax income.
If you are considering undertaking a property development and are unsure about which category you might fall into, then please contact us before you start.
If you have commenced a development, there may be opportunities to maximise your benefit, so again, please get in touch if you’re unsure.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries