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Here are the tax implications when investing in property development in Australia.

You need to consider many factors if you want to undertake a property development because it is more complex than just flipping a house. You need to know your tax and GST obligations and how these can affect the success of your project.

The profit you earn from property development can get taxed depending on the nature of your development, which can be disposal of trading stock, realization of a capital asset or used for a profit-making scheme.

The ATO considers the land that you have purchased solely for development purposes to be trading stock – a property or asset which is owned solely for selling, manufacturing or exchanging to earn a profit. For tax purposes, the property is considered as trading stock if you purchased it to sell in the future, if you buy land regularly or if your activities on it are large in scale.

When the land is considered as trading stock, you need to include a valuation of the asset on your annual tax return. It can be based on the market value, purchase cost or replacement value and the valuation method can change each year. The opening value of the property at the start of the year should be the same as the previous year’s closing value, though.

You can then choose to reduce or defer the income and change the stock valuation method used. You can take advantage of tax losses in previous years and choose a method that increases its value. When it’s time to sell, any tax liabilities are not taxable until settlement happens.

Your sale may be considered as making a profit if your intention to make a profit was already there when you purchased it and if you made the profit as a commercial transaction. If you purchased a property and subdivided it to develop two units to sell them, the profit is taxed as your ordinary income in the year when settlement occurs. 50% of the capital gains tax concession is not available to these activities. Property purchased and sold in such manner is considered trading stock.

If you do not sell the property as a business activity or development, it is considered a realisation of a capital asset and part of your CGT, therefore it qualifies to receive capital gains tax concessions. It is taxed in the year when sale contracts are executed.

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Being a property developer or property buyer can have different impacts on the tax and GST you are likely to pay. As a property developer, you buy, sell, renovate or build property on land to make a profit. A property investor usually buys property or land to generate a continuous income like buying a property and renting it out.

When you develop a property, it’s like you’re running a business. If you earn more than the GST threshold of $75,000 in a year or if you run your development activities as a business, you will need to register for GST. Those who are registered for GST can claim GST credits on the property development costs but would need to pay GST when they sell the property. It’s calculated as 1/11^th of the sale price. The ATO has put a GST withholding scheme where property buyers are required to withhold GST from the contract price, which is paid to the ATO directly.

The GST margin scheme allows for a reduction of the amount of GST you are liable for. The seller and buyer must agree on this in writing. You only pay GST on the profit margin of the property development but does not include costs incurred in the development. You are eligible for the scheme if you purchased the property before 1 July 2000, you purchased it under a taxable supply and the margin scheme was used or you purchased it from someone who’s not registered for GST. If it applies, the buyer cannot claim GST on the purchase.

When you sell a property that’s leased to a tenant, it may reduce your GST. You can include this lease in the sale contract so the sale of the property can qualify as the supply of a going concern, which is GST-free. Both seller and buyer must be registered for GST, though. The ATO may challenge you and if they determine that the sale did not qualify as GST-free, you will be liable for the full GST amount.

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If you make a loss on the development, you can indefinitely carry it forward to be claimed as a property development tax deduction against future income tax. You can use the loss to reduce the capital gain your made in that financial year. If you don’t have any yet, you can carry it forward in future years. The loss can be a tax loss or capital loss. Tax loss is when the total deductions you claim on your income tax are more than your total assessable income while capital loss occurs when you sell a capital asset for less than its tax value.

Avoid some mistakes when undertaking property development so you won’t liable be for GST or the ATO won’t audit you. Don’t register for GST when you are under the GST threshold as it can cut out 10% of your profit needlessly. Don’t charge GST on a pre-GST property or one you are looking to rent out. Read your sale contract carefully so you don’t get caught out on agreements you weren’t aware of like the GST margin scheme. Don’t claim the 50% capital gains tax discount if you’re making a profit or claim property development related tax deductions on personal items. Don’t forget to account for trading stock when developing multiple properties otherwise it will skew your profit/loss.

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As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.

You can click here to speak to a business, accounting and bookkeeping firm. We also offer hospitality business consultation and mortgage services. We will give you a call to know more about your needs. We will explain to you how we can improve your business.

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