Many family business owners in Perth invest in property as a wealth strategy. However, what happens when a simple investment turns into a full-fledged development project? The shift from property investor to property developer comes with significant tax implications that can impact the project’s after-tax profitability.
Are You an Investor or a Property Developer? Understanding Your Tax Status
The tax impact of changing from a property investor to a property developer is significant. It can be used to maximise specific tax-free opportunities, like the 50% capital gains tax discount, or to defer tax liabilities from the moment of sale to later.
Determining the exact moment you transition from investor to developer depends on the activities taking place at the time. A family that routinely develops long-term assets will trigger the moment early, and a family that undertakes a very small development might be able to defer the moment.
Families might benefit from accelerating or delaying the transition depending on their situation.
Property tax structuring can be complex, but expert advice makes a difference. Contact Westcourt today for tailored tax solutions.
How Are Property Developers Taxed?
If you are a property developer, you are running a business. The development and amount of money involved in building a 12-unit apartment development is considerably more complex and has a much higher turnover than, say, the local coffee shop.
As a business owner, a property developer does not hold the property for the long term. The property held is not on capital account. Instead, it is classified as a short-term profit-making scheme or trading stock. So, the property developer is not entitled to the 50% Capital Gains Tax discount on the sale.
Simply holding the land for over 12 months does not qualify a property developer for the 50% CGT discount. The discount only applies to assets purchased on a capital account as long-term investments.
The nature of the asset held will drive the tax impact of the asset. And the right structure for your property development activities will also impact your overall tax profile. A company cannot enjoy the 50% CGT discount. So, trying to maximize the value and increase the discount is not so relevant.
Example: Perth Property Developments Trust
Perth Property Developments Trust buys a large block of land in Mt Lawley for $3.5m. The purchase is subject to council planning approval for a 15-unit development, which happens when the property is purchased. Architectural and building plans are drafted, 14 units are pre-sold, the land is subdivided, and a builder is engaged to commence the development.
The subdivision, pre-sale, and builder arrangements take 14 months to finalize.
After the site is cleared and minor preliminary works commence, the trust cancels all contracts and sells the land for $4.5m.
The $1m profit on the sale is fully taxed. The trust is ineligible for the 50% CGT discount and cannot offset the profit against any capital losses it holds.
Tax Implications of Becoming a Property Developer
If a person accidentally becomes a property developer, the tax treatment of that moment is more complex. While the asset was a long-term investment, the investor qualified for the 50% capital gains tax discount. However, the discount no longer applies once the land becomes a development asset.
When a person moves away from being a property investor to a property developer, they are deemed, for tax purposes, to have sold the property, triggered a capital gains tax event, and then repurchased the property as a developer.
A comprehensive valuation will determine the sale price. The difference between the asset’s cost base and its valuation will trigger a capital gains tax event, which qualifies for the 50% CGT discount.
Example: Perth Caravan Trust
Perth Caravan Trust has a vacant block of land used to store caravans. The land has been held for 15 years and generates rental income from renting caravan sites to people who are not using their caravans.
The Trust’s family decides to take the land and convert it from dry storage to an 8-story office building. The office building is converted to strata-titled offices to be sold to individual investors.
When the land is converted from a dry storage site to a development, it is deemed sold. So, if the land was purchased for, say, $450k, and it is worth $5m when it becomes a business, the trust will trigger a capital gain of $4.55m.
The $4.55m profit will likely enjoy the 50% CGT discount, and the small business capital gains tax concessions may also apply, based on advice from a Perth tax accountant.
GST Considerations for Property Developers
It is widely known that property developers can enjoy the GST margin scheme when they sell properties. However, applying the GST margin scheme involves several tax considerations that must be carefully assessed.
As a property developer, the GST margin scheme is not always the most beneficial tax outcome. Importantly, a property developer cannot claim GST credits on the property purchase when using the GST margin scheme.
Understanding the intended client for the developed property is crucial. A range of other GST concessions may apply, including the GST going concern exemption and GST residential exemption. Proper planning ensures you choose the most tax-efficient approach.
How Westcourt Can Help You Navigate Property Tax
Property developers handle significant amounts of money, so talking to an experienced tax advisor in Perth is essential. This is where Westcourt stands out.
We specialise in tax and business advice for family businesses, providing independent advice with fixed, upfront pricing agreements. As part of a global tax network of 30,000 advisors, we offer local expertise in Perth and across the Eastern States.
Navigating property tax laws can be challenging, but you don’t have to do it alone. Contact Westcourt today for expert guidance on structuring your property investments tax-efficiently.
