Property development is an attractive way for many Australians to create wealth.
However, a common mistake is to overlook, underestimate, or be unaware of the tax traps involved in any property development project.
These traps can come back to bite you in the form of a significant, unbudgeted tax bill at the end of the project.
Fortunately, if builders, property developers, buyers’ agents and development project managers factor tax planning into their project feasibility, they can achieve significantly increased returns for their clients: particularly on unit developments and land subdivision projects.
Good tax planning can also increase success rates when closing deals – and improve repeat business.
To prevent misunderstanding, the three major tax traps are:
1. The 10-percent GST trap
When you build a new house as part of a subdivision, it is a taxable supply, i.e. subject to GST.
But whether you need to pay GST depends on tax rules and whether it considers you to be carrying out the project as a business venture or an investment.
As a rule of thumb, you will pay much more tax if you are deemed to be doing business, as that attracts 10 percent GST, and also excludes you from many of the tax incentives available to investors. So, if you have not factored this into your workings, you could be significantly out of pocket when you sell the houses.
Many developers do not consider themselves to be business people, especially if it is their first venture, or a side venture to their main profession. The distinction between been considered as a business person or an investor can be very subtle and can vary depending on each individual case. This distinction is important as it has a significant impact on the tax your will have to pay. Therefore, it is always recommended you consult your accountant before putting an offer in on a block.
2. The capital gains trap
Investors may be eligible for a variety of special tax incentives: including a 50 percent discount on capital gains made after the sale of the property. This literally reduces any tax you pay on your capital gains by half.
Unfortunately, you cannot benefit from this discount if:
3. The wrong ownership structure
The legal structure under which you carry out your property development determines two areas:
Therefore, a correctly-optimised property ownership structure can save you thousands of dollars in tax. What’s more, it can also protect your personal assets in the event of bankruptcy.
Because there is no ‘one size fits all’ category, any developer will benefit greatly by speaking to their accountant.
This enables you to get the ownership structure of your project sorted before making an offer – thus saving you thousands of dollars.
Property developers should always do their due diligence on any project to factor in their Return on Investment (RoI) after tax. In other words, they should work out exactly how much tax they are likely to pay on any gains made on the project; and then plan for the best tax outcome and protection for their personal assets should anything go wrong.
Never leave the tax outcome of a property development project to chance. Always consult a property-focused accountant experienced in property subdivisions before putting in any offer on a development. It can save you a lot of money by helping minimise your tax proactively and strategically.
Contact us today for a free 30-minute consultation.