What is a profit-making transaction when it comes to property?

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), which means that the net profit from the transaction will be included in the tax return of the entity that holds the asset.

In other words, if you were to make a profit of $200,000 and you held the asset in your individual name or a trust, you would declare the full $200,000 as net income in your tax return and pay tax at your marginal rate (individual) or the marginal rates of the respective beneficiaries (trust). The highest rate of tax you would pay is currently 49 per cent (inclusive of Medicare levy) or $98,000. If the entity was a company, you would pay 30 per cent of the profit in tax ($60,000) or 27.5 per cent ($55,000), depending on whether your company qualifies as a small business entity with turnover of $10 million or less.

As previously mentioned in an earlier blog, the key distinction between a mere realisation and a profit-making transaction is your intention when you purchase the asset.

There have been many cases that have been before the courts on this issue of capital vs revenue and whether property was purchased with the intention to sell for a profit or hold for rental purposes.

In what may seem an extreme case, a property developer had held a parcel of land for 20 years and due to her history and the fact that the land was ‘ripe for subdivision’ and she was aware of this, it was held that the land was purchased for resale at a profit.

In other cases, townhouses were developed and never offered for rent and as such were considered to be developed for the purpose of sale at a profit.

An example of a property sale considered to be on revenue account is as follows:

Mr Veritas purchased a property as his primary residence and lived in that property for a few years. He then subdivided and developed the property with two units at the rear of the property. At completion, the properties were listed with a real estate agent for sale. The properties were successfully sold shortly after completion.

The profits derived from the development and sale of properties that were not offered or held for rent are income. In determining whether there is a purpose of profit-making, the actions of Mr Veritas in subdividing and developing the property to make profits from the sale of property indicate that the purpose was profit-making. The sale of the properties was considered to be on revenue account and assessed accordingly.

Just from these couple of examples above, you can see that what might seem on the surface to be a mere realisation (capital) is in fact considered as a profit-making transaction (revenue) and therefore taxed accordingly, which is in most cases higher than if it were to be considered capital.

Make sure you consider your intention and also your actions when you purchase and the things you do from the beginning (i.e purchase) through to sale.

If you would like some assistance or even just a second opinion, do not hesitate to contact us.

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Tony Dimitriadis
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