Revenue and capital distinction in property development transactions
When landowners (e.g. back-yard developers or established property developers) enter into an arrangement to develop and sell land, the tax law requires the taxpayer to determine whether the ultimate sale will amount to a “mere realisation” of the land, a disposal of the land in the course of a business or as part of a profit making undertaking or plan.
Gains made pursuant to a “mere realisation” transaction will be subject to the more concessionary capital gains tax (CGT) regime (e.g. 50% CGT general discount, main residence exemption and exemption for gains on pre-CGT assets).
In contrast, proceeds on “non-mere realisation” transactions – such as the disposal of land in the course of carrying on a business (e.g. an established property developer) or as part of a profit making undertaking (e.g. back-yard developers may fall into this category) will be taxed on revenue account. Proceeds taxed on revenue account will not qualify for any CGT concessions – however, losses and expenses relating to the property development may be tax deductible).
Determining whether gains on the sale of a property will qualify for the concessional CGT regime or be taxed on revenue account may not be a simple exercise. Don’t be fooled by firms promising one-page tick the box or checklist solutions to such tax problems. The application of the tax law depends on a range of commercial and private factors all of which must be carefully weighed to determine the correct tax outcome.
Detailed consideration must be given to a variety of factors (non-exhaustive list) such as:
- the length of time the land was held and the type of activities undertaken on the land prior to development;
- the purpose for which the land was originally acquired (e.g. for private, recreational, investment or development purposes);
- the location of the land (e.g. near the city fringe) and whether and by whom the land has been rezoned or subdivided;
- whether finance has been obtained to complete the development;
- the development activities of the landowner or have those activities been contracted to a project manager;
- whether the landowner sells the developed property or engages a real estate agent to do so;
- whether the landowner has an ABN and is registered for GST as an enterprise engaged in property development; and
- whether the landowner has a history of property development (e.g. scope, scale duration and degree of property development);
If you have recently sold a property or are thinking of selling a property, please speak to your Nexia Edwards Marshall NT Adviser so that we can advise you on potential tax consequences as well as how to structure the development and/or sale.
Nexia Edwards Marshall NT has significant experience in the property and construction industry and have a dedicated team that can assist you.
Building and construction businesses: taxable payment reporting
Taxpayers operating in the building and construction industry must lodge with the ATO by 28 August 2018 their Taxable payments annual report, detailing the total payments made to contractors in 2018.
Through the use of data matching, the information in such reports will enable the ATO to detect contractors who have either not lodged their tax return or have not reported all of their income in their BASs and income tax returns.
Penalties may apply if such reports are not lodged by the due date.
Please contact your Nexia Edwards Marshall NT Adviser so that we can help you complete and lodge your report on time.
How can Nexia Edwards Marshall NT help you?
For any questions or to discuss any of the above in relation to your personal situation, please contact Sarah McEachern or your Nexia Edwards Marshall NT Adviser.