Sometimes, it can be tricky to tell if someone is involved in property development or just making use of an existing asset. For example, if someone subdivides their backyard, builds one or more units, and sells them, it’s not always clear whether this counts as property development or simply selling an asset they’ve used mainly for living purposes.
Even if a person isn’t typically in the property development business, a single project might still classify as such. The tax implications between property development and just selling an asset can be very different.
Tax Implications
Property Development:
- Gains are taxed as ordinary income or business income.
- No access to the 50% capital gains tax (CGT) discount, which would usually reduce the taxable amount.
- Relevant expenses are generally deductible in the year they’re incurred, which can benefit the developer.
Merely Realising an Asset:
- Gains are taxed under the CGT regime, with the potential benefit of a 50% CGT discount if the property has been owned for more than 12 months.
- If the property was acquired before September 20, 1985, there might be no tax consequences at all.
How Does the Tax Office Differentiate?
The Tax Office looks at several factors to distinguish between property development and realising an asset:
- Intention at Acquisition:
- Was the land bought to develop and sell for profit?
- Or was it bought for a non-profit purpose, like living in it as a home? (This can be hard to determine in today’s property market.)
- Level of Involvement:
- Generally, if a person is less involved and acts passively, it’s considered merely realising an asset. However, this is not a hard and fast rule.
Other considerations
There are also important GST implications depending on the activity and the property involved. Plus, just because it’s a one-off transaction doesn’t mean profits are exempt from being taxed as ordinary or business income.