Understanding the differences between residential “Property investment” and “Property Development” is critical for anyone thinking of getting into the property development game. Whilst both activities revolve around real estate, the tax treatment differs significantly, particularly with income tax, GST, the timing of when you pay tax, and capital gains tax discounts.
Income Tax / Capital Gains Tax:
Property Investment:
- Any gains made on the sale of investment properties are taxed under the capital gains tax (CGT) rules. More about that later in the article.
Property Development:
- Property development is considered to be a “business enterprise” by the ATO, and any profits made on a property development are not taxed under the CGT rules, but are instead taxed as ordinary business income.
- The ATO treats the sale of a developed property as if it was the sale of trading stock or inventory.
GST:
Property Investment:
- Residential rental income is “input taxed” meaning no GST is charged on the rent and no GST is claimable on any expenses.
- The sale of residential properties used as long term investments are generally GST free unless they are new residential properties.
Property Development:
- Developers are required to register for GST if their turnover is expected to be greater than $75,000.
- GST applies to the sale of new residential properties.
- Developers can claim GST credits on any expenses related to the development.
Timing of tax events:
As an example, Sam exchanged contracts on a property on 29th June 2024, but settlement is not booked until 29th August 2024. In what financial year does Sam declare the gain on this sale?
Property investment:
- Capital Gains tax is generally triggered in the year of the contract exchange date, not settlement.
- Using the example from Sam above, he would have to declare any capital gain in his 2024FY tax return, as he exchanged contracts on 29th June 2024.
Property Development:
- Any income / profit made from the sale of the property is usually recognised at settlement, not exchange.
- Using the example from Sam above, he would have to declare any profits from his property development business in the 2025FY as he did not settle on the property until 29th August 2024.
- GST obligations arise on the earlier of settlement or payment date.
Capital Gains tax discount:
Property Investment:
- Properties held for more than 12 months may qualify for the 50% capital gains tax discount (provided the property was held by an individual, or a trust that distributes the gain to an individual).
- This discount reduces the taxable capital gain by half, making property investment attractive for long – term investors.
Property Development:
- Capital Gains tax discounts do not apply to property development profits, as the ATO classifies this activity as a business, and any property sales are classified as trading stock sales.
If you have any specific scenarios you wanted to run by our team, please get in touch!
Disclaimer: This is general information only and is not advice. Liability limited by a scheme approved under professional standards legislation.