Why your profit may not be a CGT issue and double the tax

We often encounter posts on PC regarding people seeking to do a small dev or build etc and sell for profit. The common question is asked - How much CGT is there and how much of an exemption for a former main residence ?

The typical response suggests that the tax issue may not even involve CGT and could be subject to ordinary income rules.

Why ?

Lets go back into time to the days before CGT was introduced by then Treasurer Keating and PM Hawke's Govt. s25A of the 1936 Tax Act was introduced when CGT was introduced. It refers a taxpayer to the now rewritten 1997 Tax Act and specifically s15-15

s15-15 (1) says Your assessable income includes profit arising from the carrying on or carrying out of a profit making undertaking or plan.

Lets break that down
- Profit is taxed as ordinary income, not CGT provisions
- Is applicable to a undertaking OR a plan, even both. So it is intention based.
- Refers to profit...Hmmm that means I make a loss and I'm not included ? Wrong. Profit in a taxation sense also includes references to a loss

One of the most important elements to this tax law is the intention. The ATO vigorously seek to apply that intention based on the taxpayers intent at the time the land is acquired AND if its changes later. This is evident in appeals, rulings and case decisions. What does this mean ?
1. A taxpayers with an initial intent will be bound by this forever and
2. A taxpayer who did NOT have an intention to produce profit at the outset who later changes that view and commences a profit making venture (even if it is a isolated intention rather than repetitive) may be caught and find the profit is then subject to ordinary income rules. And without a CGT event to trigger a CGT issue for the accrued benefit to that time the past profit may also fall under the ordinary income rules.

The other consideration to profit making ventures is that it also may be an enterprise. This could mean GST is impacted.

The importance of tax and also legal structuring advice early is quite evident with these ventures. This could even find that the matter is a CGT issue and not subject to ordinary income. Or may advise on ways to limit the ordinary income rules being a factor.

More information an be read in our developer toolkit.