Even though investing in the property market can be financially rewarding, many developers commit blunders which hinder building financial success. Many of these blunders are because of the developers’ lack of knowledge regarding residential property taxes as set by the Australian Taxation Office (ATO).
Residential property as a primary place of residence is generally exempted from taxes. However, undertaking a property development and the intended use of the property after its development influences if the property is taxable. Here are some of the common tax pitfalls you should avoid when investing in property development.
Vacant land is generally considered as a capital asset and is subjected to capital gains tax. 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.
The home that you live in (i.e. your primary place of residence) is usually not taxable. But if you rent a portion of the dwelling or use it for any other commercial activity or if your home stands on a land greater than 2 hectares, it might be taxable. The same applies to inherited dwellings. Any sale of residential property (not your primary place of residence) is also usually subject to capital gains tax.
During the project, the developer is able to claim back GST for components of the project, the developer can use the “Margin Scheme” to reduce tax payable as well. On completion of the project the Developer can also have access to depreciation costs of the building. The depreciation value of a building is determined by the life of the building and its cost. This value can be legally deducted in the form of expenses. A developer will get this facility from all his projects and can considerably reduce the annual tax.