Property transactions involving development activities can sometimes blur the line between property development and “merely realising an asset.” The differentiation between the two is crucial, as the tax implications can vary significantly. In this blog article, we will explore the factors that help determine whether an individual is engaged in property development or simply realising an asset. Understanding these distinctions is essential for optimising tax outcomes.  

 

Property development and tax consequences

When individuals undertake property development activities, any gains realised are generally considered ordinary income or business income. Importantly, these gains do not qualify for the capital gains tax (CGT) 50% discount, which reduces the assessable amount. However, expenses incurred during the development process are typically deductible in the year they are incurred, offering potential tax benefits for developers.

 

Realising an asset and CGT concessions

In contrast, when individuals are “merely realising an asset,” any gains are subject to the concessional capital gains tax (CGT) regime. This allows for a 50% CGT discount, provided the property has been owned for more than 12 months. If the property was acquired before 20 September 1985, there are typically no CGT or ordinary income consequences. It’s worth noting that there are still pre-CGT properties in existence, offering unique opportunities for asset realisation.

 

Determining the nature of the activity

Distinguishing between property development and realising an asset may not always be evident based solely on the nature of the activity. However, several factors play a significant role in making this determination. One crucial factor is the original intention with which the land was acquired. Was it acquired with the intention of developing and selling it for profit, or for some other non-profit purpose, such as personal residence? The level of involvement in the activity is also important. Generally, a more passive role indicates “merely realising an asset,” but this is not a strict rule.

 

Additional considerations

In addition to tax implications, there are important Goods and Services Tax (GST) consequences depending on the nature of the activity and the property involved. It is advisable to seek professional advice to navigate these complex tax obligations effectively.

 

Conclusion

The fine line between property development and “merely realising an asset” can have significant tax implications. Therefore, it is crucial to carefully assess the original intention behind the land acquisition and the level of involvement in the activity. Seeking professional advice is highly recommended to achieve the best possible tax outcomes.

If you are contemplating any property-related activity, reach out to Regency Partners for expert guidance and assistance in optimising your tax position.