When does your investment property become a “development”?
Many Australians hold investment properties, and most would not consider themselves to be property developers. However the ATO may take a different view. There have been many cases where people have been deemed to be carrying on a business of property development upon selling a property, resulting in serious tax consequences.
Factors to consider when determining whether you are a developer or an investor:
- Do you, or entities connected with you, have a history of buying and selling property?
- Was your intention upon purchase to build/renovate and sell, or hold the property?
- What is the nature and scope of work performed on the property prior to sale?
- Is the activity organised and carried on in a business-like manner?
- How much has been expended leading up to the sale of the property?
- Is there a joint venture?
What are the implications?
If the sale of a property is simply the realisation of a capital asset, it will result in a capital gain or loss. Capital gains may be eligible for the 50% general discount if held for over 12 months, and may be eligible for further small business CGT concessions if other criteria are met. Conversely, if the sale is made in the course of your property development business, the profit will be taxed at your marginal rate.
If a property investor is not registered for GST, the sale of their investment property will usually be exempt from GST, even if the sale price exceeds the GST turnover threshold. Developers will generally be liable for GST on the sale if the property is considered to be “new” or “substantially renovated”.
If you are considering a property purchase…
Property transactions can be complex, and are often a grey area. Even one-off transactions may be considered to be carrying on a business. Further to this, it is important to have the right structure in place to carry out the transaction and mitigate risk. We strongly recommend speaking to a trusted adviser prior to engaging in any property transactions.
For valuable advice tailored to your circumstances, get in touch with BLG Business Advisers experienced team online or call (02) 4229 2211.