What is the tax difference between a Property Developer and an Investor?
An area that I am commonly asked about is about what are the taxation implications of developing a property? Given the significant value of the transaction it is a very good question as the taxation implications can have a dramatic impact on the profitability of the project.
Property investors and developers face a wide range of tax issues. Due to the size and monetary outlay associated with property investment and development, the consequences of not being aware of tax issues can have a significant effect. With careful planning and the right advice, the correct strategy can be implemented to reduce and minimise tax on specific projects and investments.
The first question is: “What is your intention?, do you want to sell at a profit or keep and rent for ongoing income”.
If you plan is to rent it out, then you are probably a property investor. If your plan is to sell at a profit then you would be classified as a developer.
Taxation for Developers
Even if this is your first and potentially only transaction and if your intention is to make a profit then the development will be defined as a “business activity”. Hence you will need to consider the following taxation implications:
- GST, if the development will sell for more than $75,000 (which all developments do) then you are required to register for GST. The GST can be claimed back on development expenses which include GST, but GST is also payable on the final sale proceeds.
- Income Tax, as the development was undertaken to make a profit then the profit will be assessable at your marginal taxation rates. If there is a loss then this can offset other taxable income.
Taxation for Investors
Investors fall into under the Capital Gains Tax regime whereby they are assessed on any profit they make on the disposal of the property which may result in you paying tax on 50% of the gain that you make on sale.
Investors are not subject to GST as the development is not a “business transaction with a view to a profit”.
Obviously there are very different outcomes from both.
Other Areas of Consideration
The above provides a brief guide, other issues that will affect the taxation implications of the transaction include:
- Had the property been your place of residence previously?
- Did you buy the initial land from a developer or private owner and can the margin scheme apply?
- Was the land purchased pre 19 September 1985 (pre Capital Gains Tax)?
- Did you inherent the land.
Prior to undertaking any development I would recommend that you contact us to discuss your intention to make sure that the taxation implications and obligations are fully understood.