Property developers walk a fine line between profits on the sale of properties being considered by the ATO to be on a Revenue Account ( profits subject to income tax) or on a Capital Account (profits/gains subject to CGT, with a potential 50%).

Careful planning for various tax treatments will impact the property development strategy, which could save tens of thousands of dollars in unnecessary taxes.

Projects that are considered on a Revenue Account, have the added complexity of potential being subject to GST or not?

It is important to understand and document your intentions at the start of a property development project so you can get advice to plan which tax treatment will be applicated to profits, either on Revenue or Capital Account, GST or Input Taxed (No GST) treatment on Sales.

The ATO will look to the objective intention or changes in intentions to assess the tax treatment. Intentions will indicate if the development is considered an enterprise, or an isolated one-off transaction that has the characteristic of a business deal or is seen as a mere realisation of a property.

ATO – Determine if you are running a property development enterprise

Buy, Develop and Hold Strategy

(BDHS)

Mere Realisation

Profit – CGT

Mere realisation of an asset strategy

A “mere realisation of an asset” implies that the profits made are on a capital account, the gains assessed as statutory income under the capital gains tax provisions, and the opportunity to benefit from a 50% discount on any CGT. Otherwise, the activities conducted would be seen as an isolated business venture or enterprise and assessed as ordinary income at the owner’s full marginal tax rate.

Factors to indicate a Mere Realisations of long-held assets prior to development.

• No profit motive at the time of purchase
• No history of property developments
• Minimal effort and risk were assumed to subdivide at a later stage.
• No construction of roads, buildings

Tax Treatment

• Property sales on a capital account generally will not be subject to GST, not a taxable supply. No GST, No ABN is required.

Factors to indicate a Mere Realisation of assets held long term after the development.

The main difference from the above example is that after the development will be a long-term hold for capital growth in the future.

•  Long-term hold motive after the development
• Prior history of property development is not so important, however, may indicate a change from trading stock back to capital asset.
• Can have a high busines like effort and risk to subdived or construct is OK

Tax Treatment

• Assuming no change of intention, still no entitlement to an ABN, not able to claim or charge GST
• The sale of a new build under 5 years may be considered a change of intentions, so signal a GST liability and retrospective registration and ABN requirements.
• Property sales on a capital account generally will not be subject to GST, No GST, No ABN is required.

Mere Realisation Example

Example 34 ATO – MT 2006/1

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

Enterprise Property Developers do not have subjective intentions as to the property development been considered a mere realisation, accidential developer or flipper.

The intention is to develop property as a business!

Factors to Consider

• Size and scale of the business
• Property to be considered trading stock
• Many potential investors or stakeholders
• Income and expenses on revenue account.

Tax Treatment

• Entitled to ABN & GST Registration
• Income is ordinary income
• Use of Complex Tax Structures to separate income and risk. 

Example – Isolated Property Developments Enterpise.

MT 2006/1

Example 28

271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit.

272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner.

Example – Isolated Property Development for Private Benefit – Enterprise

MT 2006/1 

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

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