Understanding Tax Implications
Recognising the various tax implications of developing a property is crucial to maximising profit
In a beachside suburb, an astute business person acquires a property on a large block ready for for occupation as a main residence (MR). The property turns out to also be suitable for subdividion.
Being aware, the business person recognises the acquired property presents potential for profit. So they enquire as to the options available to extract profit within the shortest possible time and with minimum effort. And, more importantly, what the tax implications of each alternative are. Here are some considerations.
No Action – Advantages
Where no action is taken, and the property is occupied as an MR, the tax advantage is that any growth in the value of the property will be exempt from tax when sold. A prerequisite is that the property is established as an MR.
Establishing MR – factors
Factors which the Australian Taxation Office (ATO) consider relevant in working out whether a dwelling is a main residence include the
- length of time you live there (while no figure is specified, I consider 12 months reasonable for average circumstances),
- whether a family lives there,
- if personal belongings have been moved into the home,
- if it is the address to which your mail is delivered,
- if it is the address on the electoral roll,
- if it s the address on your Driver’s Licence
- whether it is connected to services (phone, gas or electricity), and
- what your intention in occupying the dwelling is.
Lodging DA – Tax impact
Lodging a development application (DA) with the local council to subdivide the property has no tax implication in itself. Neither does obtaining the DA approval with no further action.
Subdividing – selling vacant land
However, if the subdivision is implemented and the vacant land is sold, after 12 months of acquisition a taxable capital gain may arise on the ‘realisation of the capital asset’.
Subdividing – constructing on vacant land
Constructing a house on the vacant subdivided land and renting it out is considered an investment.
The only tax implications will be if the net rental is positive. Negative rental will be offset against other income, reducing tax. Capital gains may arise on a subsequent sale.
Selling the newly constructed property may mean there was a business of property development being carried out, with an intention to generate profit. Therefore, the net profit on sale will be subject to income tax. Registration for GST may also be necessary.
Careful consideration of the resultant profit should be made before adopting this option.
Occupying the newly constructed property as the MR and selling the original MR may be an attractive proposition, providing a new dwelling with no tax implication on selling the original one. As the new property did not start as a MR, there will be some capital gains tax implications on selling. However, this will reduce the longer the property is occupied as an MR.
Where it is clear that the ‘intention’ of the acquisition and any further improvement is to derive a profit, there will either be income tax or discounted capital gains tax implications.
To help with your decision it is always best to discuss the deal and the options available for your specific circumstances with your property tax specialist before committing to a transaction.
DISCLAIMER – notes above are general in nature, intended to be educational and for discussion only. As we do not know the reader’s particular circumstances it is not advice and should not be acted upon without advice which is specific to the individual’s circumstances, from your financial adviser, accountant. or Property Tax Specialist