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Residential Property Development – The Taxes

Residential Property Development – The Taxes

Residential property development can be very lucrative. In the current poor global economic climate and the constant highs and lows of the stock market, property development is considered by many to be  a sound method of building financial success. The number of people investing in property development has increased considerably in recent times, especially since the government has allowed the inclusion of property into SMSF’s. Also with state governments increasing the cash grants for new homeowners, this growing trend, at least in the short term, is in my opinion here to stay.

Whilst property development is lucrative, many first time developers commit “blunders”. Most of these “blunders” are because of the investors’ inability to fully understand the tax laws as set by the ATO (Australian Taxation Office). Residential property is generally exempt from taxes. However, the nature of the development and intended use of the property after its development affects the property’s tax position. Below are some of the common tax pitfalls to avoid when undertaking a property development.

Overview of the ATO Policy

Residential property is commonly exempt from taxes. But if you undertake a developmental project on the property such as a renovation or modification such that it generates profit, the property profits may become taxable. For example, the property is a taxable asset if it is intended for the purpose of running a business. In this case, it may be subjected to income tax, GST (Goods and Services Tax) and also capital gains tax.

Tax Policy for Your Home

The home that you live in is usually not taxable. But if you rent out a portion of the dwelling or use it for any other commercial, it might be taxable. The same applies to inherited dwellings. Any sale of residential property is also subjected to capital gains tax, unless it is solely your principal place of residence.

Tax Policy for Residential Land

Vacant land is generally considered as a capital asset and is subjected to capital gains tax on sale. If you purchase the land for business purposes such as for resale, such land is considered as trading stock and the revenue generated is considered as ordinary income, which is subject to GST. The same rule applies to the subdivision of land.

Malyshka Pty Ltd is not a financial advisor, and nothing contained in this post constitutes financial advice. Everyone is advise to gain professional and independent advice before undertaking any investment of any kind.

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