On 28 July the Australian Taxation Office ("ATO") released a Taxpayer Alert looking at property development. The ATO are focussing on developments which take place in trust arrangements. Property development is a hugely complex area of law as the difference between simply getting the best value for an asset you hold and being in the business of developing is hard to define.
This is something which the ATO have taken to the Courts on many occasions claiming a taxpayer is developing land as an isolated business transaction or as part of an ongoing business. Where the ATO win the result is that the taxpayer has no access to the Capital Gains Tax ("CGT") 50% discount and no access to the small business concessions which can include the ability to put some of the gain into superannuation free of tax.
To ensure that the proceeds on the sale of your property are taxed under the CGT provisions and are subject to the appropriate concessions it is important that your activities in preparing it for sale amount to no more than the mere realisation of the asset in the most profitable way and are not business transactions. This does not mean that no one else can assist you with the sale as a part of their business, just that the owner of the land, assuming the land is a capital asset to start with, does not unwittingly start to use that land in a business venture of its own.
While the current ATO alert refers to those who have experience in either developing or selling property; in the past the Commissioner has taken a surprising array of different people with no property development experience to court claiming that they claimed CGT concessions they were not entitled to. These include:
- a farmer who subdivided and sold some uneconomic farm land[1] – the court agreed he had a capital gain;
- an orchardist who subdivided and sold his land when it was rezoned[2] – the court agreed he had a capital gain;
- a company that bought a piece of land as an investment, started to develop it and later resold it[3] – the court agreed it remained a capital asset although in this case it made a loss.
It is essential to get professional advice in connection with property development no matter how straight forward it may at first appear. Not only the ATO but also RevenueSA can give some very nasty surprises to unwary developers who do not realise just what and where the risks are. To properly structure your development and ensure you take into account all the issues and potential costs please contact John Tucker.
Casimaty v Commissioner of Taxation [1997] FCA 1388.
Re McCorkell & Federal Commissioner of Taxation, (1998) 98 ATC 2199.
Price Street Professional Centre Pty Ltd v FC of T, [2007] FCAFC 154
