Are you keen on learning about capital gains tax on property development profits?
Before we get cracking on this topic, we need to mention that we are not financial or tax advisors or agents — all the information we provide in this article is from our own experience.
It is super essential always to seek professional financial and/or legal advice if and when you need it.
And in this game, there is a lot of red tape, so there’s no shame in relying on people who deal with red-tape for a living.
So we’re going to keep this article as a bit of light reading and try to debunk the number one question that people ask us – which is about capital gains tax.
We often get asked how to avoid any capital gains tax implications when undertaking a development project.
You need to reframe your thinking on this. If you are facing capital gains tax implications, it’s because you’re making some money, which is a positive: the more money, the more tax.
Don’t be scared of it, rejoice because you’re turning a profit and you can use your success to build. And of course, there are always tax deductions available.
Ready? Let’s get into it!
What is Capital Gains Tax?
Put simply, capital gains tax on property development is tax paid when you sell a capital asset (in this case, real estate).
It’s worth noting that any capital gains made in a financial year are considered a part of your taxable income, so if you’re working or running a business all profits are pooled together to make your taxable income.
If you’re after the official definition from Investopedia, which is a competent authority on all things investment, it is:
Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realised until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
Do property developers pay capital gains tax?
Put simply, in the property development game; you are generating income by developing real estate. Any profit you make is your income.
And because you are working with capital assets, in this case, real estate, you have to pay capital gains tax.
Again it is worth stressing that you want to be in a position where you are paying capital gains tax. Because it means you have income from developing a property.
The alternative is a capital loss, and you didn’t get into this to lose money, did you?
How to Avoid Capital Gains Tax on Property Development
One way to avoid paying capital gains tax on a property you develop is by living in it. Your principal place of residence is always tax-free.
For this exemption, your land needs a dwelling situated on it, and you must have lived in it that financial year.
So you can’t buy a vacant block and claim the exemption. You and your family need to reside there.
This isn’t how we do it. We like to finish a project having sold the properties of the plan, pay our taxes on the profit and roll our capital over into the next project, while profiting off the difference.
Reframe Your Thinking
A great way to look at capital gains tax, as we said above, is by thinking of it as additional income tax.
In your day job your payroll folks withhold a portion of your income as PAYG, right? And come tax time you either wind up with a tax bill or a tax refund, depending on your deductions and income.
If you do a development project along with your day job, once the project is complete and you have a profit that money is classified as your taxable income.
If you generate more money, you may move into a higher tax bracket, which means you pay more tax.
But this is a positive because you are better off financially than you would be without having done the development.
By now, you’re learning more about capital gains tax on property development.
There Are Other Ways to Minimise Personal Income Tax
There are some other ways you can minimise your taxable income when undertaking residential real estate development. You can do your project via a trust structure.
That’s a whole other can of worms though. We’ll do a full article on that shortly.
Doing a development via a trust means you choose how you distribute the profits from your sales.
For example. You can allocate a portion to yourself, keeping under that next tax bracket, and another piece goes to family members.
For instance, if your spouse earns less than you in their day job, then profits distributed to them keep their taxable income lower as that’s the way tax brackets work.
Dodging Taxes Can Be a Waste of Time
Dodging taxes is a lot of work and can come back to bite you where it hurts. How many times have you seen the news where a dodgy developer is stung for tax avoidance or other corrupt dealings?
You don’t want to become a headline.
If it helps, look at the taxman as a third or fourth business partner. You divvy up the profits between your venture partners, and then the taxman takes his cut as well.
Don’t Be Put Off By the Prospect of Capital Gains Tax
Capital gains tax on property development should never deter you from doing a project. It’s not scary at all – it’s pretty straight forward.
It’s like getting a new job that pays more, or doing lots of overtime as a tradie – you get taxed accordingly.
The profits from a development project just elevate you to a higher tax bracket, which is a good thing.
Society needs taxes to operate, and by paying capital gains tax, you’re doing the right thing by your fellows and community
Remember, it is essential always to get professional financial advice. This is a good rule of thumb for life in general. Especially as you get older and become more well off.
But it is also essential when undertaking any investment, including developing property for profit.
Each situation is going to be different and therefore, would benefit from a tailored approach from a financial professional.
For example, if you are developing to rent out the dwellings, there will be different financial implications compared to developing to sell off the plan.
All we wanted to do here was to share our views based on our experiences.
This is one of the most common questions our clients and investors ask us. So it was worth sharing with our readers too.
To reiterate, it sounds scarier than it is, and it is quite simple. It’s all about how you look at it.
If you have further questions after you’ve read this, feel free to reach out to the team here. Give us a call on 1300 799 277.
Alternatively, if you are looking for professional dual occ advisors, we can help you with this as well.
We offer property development project management as a service so don’t hesitate to reach out.
We’re always happy to have a chat and explain things in more detail.