Are You Paying Too Much Tax on Your Property Developments?
Are you an arm chair developer or astute investor and business person?
Property developing seems as popular as property purchasing but the risks are significantly greater. Unfortunately, many developers make avoidable mistakes that increase their risks both commercially and tax obligations where in many cases these risks could have been avoided with proper planning and structures.
The following will identify some of the issues that you must take into consideration and then you must engage a professional to expand on the issues and help you develop a strategy and plan.
Are You in Business
The first question to ask your self is whether the property was acquired as part of a profit-making undertaking or scheme and whether your intention was to sell at a profit. If yes, you are in business.
Your taxation obligation will differ depending on whether you are developing to keep or sell or maybe a bit of both. At the heart of your tax obligations will be whether you are developing as a business for subsequent selling or as an investor to keep.
You are in business if you are developing to sell. Your first project can be identified in business. The ATO will review the scale and size of your developments as well as frequency to argue that you are in business even if you have identified yourself as buying to keep but forced to sell.
GST
If you are in business, you must register for GST and pay GST on the sale price (subject to using the margin scheme) and recoup your GST credits on purchasing goods and services. If you are developing to keep then you do not have to register for GST and therefore cannot claim GST credits on purchases of goods and services and on a subsequent sale there is no GST obligation. Please remember that even your first project can be as a business.
Tax Obligations
If you develop to keep but for some reason need to sell the sale will be deemed capital. Capital gains will have the 50% Capital gains Tax applied if the ownership period (contract exchange dates) is iver 12 months. If the development was within a company structure the company will not get the benefit of the 50% discount. If you are in the business of developing the profits are taxed at full normal tax rates. There are major differences to you tax obligations whether you are operating from a trust or a company so part of your planning must review the structure you use. The type of trust you use will also impact on tax obligations.
