I wanted to share a real client experience (names and details changed to protect identity of course). It demonstrates how a developer can choose a Plan B and make more money. Mary bought a house and land on a sizeable block. Rented it out and then one day questioned whether there may be merits in getting a council DA to subdivide. Perhaps build townhouses and make some money. Mary commenced with Council and found out all the delays and costs and got the DA. And then went searching for builders and contractors to put the dev into play. All the while the property still had tenants and no changes were made. Mary then found from agents that the feasibility was OK but rising costs meant it was a huge financial risk. A lot of funds needed too. Then rang me. We discussed the developer toolkit and how GST will impact sale of townhouses and how the profit would be taxed as ordinary income. So we did a comparison. Plan A : Develop, Build, Sell 2 new dwellings Plan B : Keep the property, Proceed to DA approval and do NOTHING to the property and sell it as a residential property with a DA. Plan A means - Holding costs. Major costs to build. Finance etc. - No fixed price cost assumption. - 12-18mths project horizon and market price risks - GST on sales. Margin scheme can be used and build costs GST can be claimed but GST will erode profits. - Profit taxed at estimated 45% Profit estimate after tax $145K Plan B - No finance issues, no holding costs or risks of guessing where market is in 18mths - Lower selling costs (half ?) - No GST. Property will be sold as existing residential premises. - Buyer gets DA approval and site plans. Agent says its an easy sell. - CGT basis applies so tax rate is 25% Profit estimate after tax $215K Key issue is that Mary does NOT demo the property or alter the land use - ie Dont clear the site. And essential the new land is NOT fenced from the rental. This would make it a separate asset - Likely trading stock !! Simple issues and simple property savvy tax advice. Without a plan this would not have been identified.
Intention to make a profit is not the same as carrying on a business. I can reno an ip before selling for example.
statham v fct is how things should be structured to ensure it doesnt cross from being on capital account to revenue account. mere DA approval doesnt cross the border in and of itself.
And this demonstrates why when "developing" its so critical to get tax advice early and incorporate all knowledge into a tax plan. It WILL save money and max profit. And its not that expensive.
Yes, but it can have the same outcome. The property may cease to be an IP when the tenancy ends and then become a isolated profit making event and then create a issue. Do you think Cherie Barber pays CGT on her published projects ? I dont. I have seen two people taken to pieces by the ATO who renovated an IP just prior to selling. ATO obtained info in each case that the owner sought views on improving to enhance value from agents and also listed it while reno occurred. They argued isolated profit making. Taxpayers had no solid defences capable of passing as a successful objection after spending a bit on legal advice. Legals, interest, penalties etc gets expensive. That said a reno that merely cleans up and remedies wear and tear and property age etc have zero concerns. It when you add and conduct substantial changes ie adding rooms, change walls, kitchens, major landscape etc. Isolated profit making and business income are taxed in a similar manner (ordinary income) but are both different. Isolated profit making results in the proceed received on revenue account meaning a CGT event may not happen. A CGT event that creates trading stock might arise first ? In its very simplest form TD 1992/135 demonstrates a basic issue of how a CGT event and a revenue event can taint tax outcomes. Its a over simplistic ruling but clearly surprises many when they read it for the first time. Its important to disregard the emphasis on the "builder" in that example. That element of the ruling can cause some to think it doesnt apply if they arent a builder.
