Developers - CGT on a Dev

[Rob G.]

Thaks Paul, that clears it up. Just got to watch whose name we put things in if we're going to be up for income tax on profits.

It is not the entity, it is what is actually being done as a question of fact.

It just happens that conducting a development in a trust is just one more indicator that helps the Commissioner spot commercial transactions.

It does not matter if you conduct it in a personal name, you should be self-reporting if speculating (purchase for resale), conducting a business or otherwise entering into a profit making scheme.

The entity used for the venture is not a magic formula to avoid tax as such.

 

[MTR]

Its a little rich that the ATO takes a bite 3 ways, as a developer when selling I have to pay -

1. stamp duty
2. capital gains tax
3. GST

at least get rid of stamp duty, biggest rort ever.

 

[Ausprop]

Its a little rich that the ATO takes a bite 3 ways, as a developer when selling I have to pay -

1. stamp duty
2. capital gains tax
3. GST

at least get rid of stamp duty, biggest rort ever.

agreed, developing is really tough paying 2.5 times or so the amount of tax that 'passive' investors pay. As I have discussed before, the tax imposition on small developers makes a big 'no mans zone' of turnover where it's just not worth developing. go hard or go home I guess.

 

[westminster]

Its a little rich that the ATO takes a bite 3 ways, as a developer when selling I have to pay -

1. stamp duty
2. capital gains tax
3. GST

at least get rid of stamp duty, biggest rort ever.

Well you only pay stamp duty on buying then if you are a developer you don't pay 2 (CGT) you pay Income Tax or Company Tax as well as GST if it's less than 5yrs post build.

I agree that stamp duty is a burden that should have been capped or scrapped as it's 5% hinderence for everyone to buy.

 

[Ausprop]

if it's less than 5yrs post build.

if a developer the time frame is irrelevant, it will apply forever

 

[Rob G.]

agreed, developing is really tough paying 2.5 times or so the amount of tax that 'passive' investors pay. As I have discussed before, the tax imposition on small developers makes a big 'no mans zone' of turnover where it's just not worth developing. go hard or go home I guess.

'Passive' developing of residential property for sale is still subject to stamp duty & GST.

The only difference at issue is the CGT discount.

Don't forget land tax whilst holding on a certain day of the year - another little state tax gem.

Of course, the rates as well to the local government to pay for all the services that are not being used by your unoccupied development property.

A real rort is the individual repetitively buying a main residence to renovate and sell which is sheltered from income tax, CGT, GST, land tax.

You know the one ... the tradie who moves his family in for a while then they vacate and he uses all his tradie mates to assist the 'renovation' before moving the family back in for a while and selling.

Not only ordinary income, but heaps of non-cash business benefits undeclared as well. And the tradies are probably claiming deductions and input tax credits on the materials supplied for their cash job for their mate's 'PPOR'.

 

[MTR]

agreed, developing is really tough paying 2.5 times or so the amount of tax that 'passive' investors pay. As I have discussed before, the tax imposition on small developers makes a big 'no mans zone' of turnover where it's just not worth developing. go hard or go home I guess.

It sucks.
I have 3 projects now on the go and still looking at what I will keep and what I will sell. There are profits to be made, certainly better than a day job, however its just not an even playing field, as per Rob's post. Developers certainly paying more than others.

 

[sanj]

It sucks.
I have 3 projects now on the go and still looking at what I will keep and what I will sell. There are profits to be made, certainly better than a day job, however its just not an even playing field, as per Rob's post. Developers certainly paying more than others.

developers should pay more than investors though because one is running a business and one is simply an investor. if you changed the asset class the same would apply, a business owner would pay more tax on 100k profit than someone say with shares in a business that are sold for 100k profit, assuming theyve been held for more than 12 months

stamp duty is a silly inefficient tax and everyone knows it but it is also unfortunatly one of the few ways states can raise revenue and so it is unlikely to disappear.

GST does smart a bit of course but it isnt like its GST on 10% of your sale price

 

[BLTN]

I agree with the general sentiments above (that tax on developments is ludicrous, and we all know that stamp duty is an inefficient and dumb tax, but as Sanj points out, it is unlikley to go anywhere).

It basically just means that developing and then selling instantly is a very tax inefficient way of doing things.

But it seems like if you do a development and hold them all for an indefinite period and only sell infrequently, you can get all of the benefits of developing while still retaining the tax treatment of a passive buy and hold investor. It seems like this isn't a hard and fast rule, but if you're intent is to develop and hold all the assets indefinitely, the tax treatment upon eventually selling one should not be materially different from just purchasing a bunch of assets and eventually selling one.

if a developer the time frame is irrelevant, it will apply forever

I'm pretty sure if you hold for 5 years (and are renting the whole time), no GST is payable on selling the places (they are no longer deemed 'new').

 

[Ausprop]

I'm pretty sure if you hold for 5 years (and are renting the whole time), no GST is payable on selling the places (they are no longer deemed 'new').

nope. line one, table on page 14. do not pass go...

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

 

[BLTN]

nope. line one, table on page 14. do not pass go...

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

But it's not line 1 - it's line 6.

I'm not buying with the intention of selling for profit. I'm buying with the intention of 'cheaply' picking up multiple brand new dwellings that will be high yielding when I rent them out.

Thanks for posting that attachment though - that basically confirms my suspicion that given my intention is as above, the tax treatment is exactly as I predicted, including the 50% CGT discount.

I think this is the optimum tax treatment - provided you are willing to hold the properties for an extended period of time (which I am, as I am in the accumulation stage of my investing).

 

[Ausprop]

But it's not line 1 - it's line 6.

I'm not buying with the intention of selling for profit. I'm buying with the intention of 'cheaply' picking up multiple brand new dwellings that will be high yielding when I rent them out.

Thanks for posting that attachment though - that basically confirms my suspicion that given my intention is as above, the tax treatment is exactly as I predicted, including the 50% CGT discount.

I think this is the optimum tax treatment - provided you are willing to hold the properties for an extended period of time (which I am, as I am in the accumulation stage of my investing).

ok but... from what I understand, it is pretty hard (fatal in fact) justifying anything other than line 1 if you are GST registered, particularly if the reason you are registered is from property dealings. But others lay it out for you to play it out...

 

[Rob G.]

developers should pay more than investors though because one is running a business and one is simply an investor.

I don't think Carl Marx was of the same opinion. Nor was Adam Smith quite so biased in his design guide for a tax system.

Why should a person sitting on their backside earning income pay less tax than one who applies their labours ?

This whole stupid distinction between income and capital comes from English law.

Trouble is that the colonies, upon becoming independent, simply took an 'off the shelf' taxation Act from the 'mother country'. Hence the problems with Commonwealth countries and the income/capital dichotomy.

We now have an untenable tax system, however the instability of fundamentally changing it is probably worse.

 

[Ausprop]

I don't think Carl Marx was of the same opinion. Nor was Adam Smith quite so biased in his design guide for a tax system.

Why should a person sitting on their backside earning income pay less tax than one who applies their labours ?

This whole stupid distinction between income and capital comes from English law.

Trouble is that the colonies, upon becoming independent, simply took an 'off the shelf' taxation Act from the 'mother country'. Hence the problems with Commonwealth countries and the income/capital dichotomy.

We now have an untenable tax system, however the instability of fundamentally changing it is probably worse.

not sure this is quite right, as the concession isn't that old. I know someone that wrote a paper on this and their conclusion was also that it is a stupid skewing of the tax law, however it falls into the whole middle class welfare bucket of the boom years. In fact amazing it has survived come to think of it.

 

[Ausprop]

ps I read Sanj's post the same way as you originally but then realised that I don't think it is an endorsement of the CGT favourable rates, it is just saying that given the current laws the level playing situation should be that...

Sanj?

 

[MTR]

'Passive' developing of residential property for sale is still subject to stamp duty & GST.



Don't forget land tax whilst holding on a certain day of the year - another little state tax gem.

Of course, the rates as well to the local government to pay for all the services that are not being used by your unoccupied development property.

It just gets better..... another tax I had to pay - its calls a contribution tax of $8000 to local council, a nice little earner for them, its calculated on how many units a developer is building and it forms a part payment for infrastructure. Still not sure what it all means, could not start developing until this was paid, just another bill for me.