Property development can take many forms. It can range from an individual home owner subdividing their backyard to a large scale development of shopping centres, office premises and new housing estates. All these have potential involvements with taxation, both income tax and GST.
A mere realisation of a capital asset will not produce assessable income for taxation. For example, individuals who subdivide and sell their backyard with or without building on it or subdivide and sell a vacant block of land they own elsewhere would be considered as mere realisation of capital assets.
A property development undertaken as carrying on an enterprise will be subject to taxation. Where an owner engages in a business-like activity of dividing the land, constructing road and other required works and then selling the individual lots, the profit emerging from these activities would be ordinary assessable income under section 6-5 of the Income Tax Assessment Act 1997. This equally applies to a single block property development.
An isolated property development could be considered as an enterprise resulting in tax obligations if it is done with the intention to make a profit or gain and the transaction is entered in the course of carrying on a business operation. A number of factors would indicate the existence of a business operation such as a business structure with a manager, office and letterhead; borrowing funds to finance the acquisition or subdivision of the property; claiming interest as a business expense; acquisition of an adjacent land; a coherent plan to subdivide and develop the land; recording the property in an account as a business asset; construction of a building; marketing and promotional activities.
Calculation of Assessable Income
For taxation purposes, the assessable income from a property development business could be calculated on a net profit basis. A net profit is derived after deducting costs of acquisition, costs of development, costs of sale and if the land was not originally acquired for commercial purposes and the market value of the land at the date it is committed to the business activity (this will obviously replace the acquisition costs) from the sale price. The net profit is brought to an account as an assessable income for the deal.
Goods and Services Tax (GST)
If GST unregistered mums and dads subdivide and sell land or property without carrying on a business, it would be considered as a mere realisation of a capital asset. They will not be eligible to claim input tax credits on their development expenditure and will not be required to remit GST on a sale of a land or a property.
When an entity is registered or required to be registered for GST, the sale of a newly developed property will be a taxable supply under section 9-5 of the Goods and Services Act 1999. The entity will be eligible to claim input tax credits incurred on the acquisitions to develop the property and required to remit GST on the consideration paid for the newly developed property.