5 Things Business Owners Need To Know Before Getting Into Property Development
Income tax will be payable on developments that aren't capital, and most developments will be on an income tax basis. So choose your structure wisely: this includes your company trust, and individual name.
CGT will be payable on developments that are ‘capital’; It’s a very small percentage, It might be that backyard that you're subdividing and selling. And, we can apportion main residence exemption - the calculation to apportion a gain when you subdivide your backyard is pretty intense, but it's a more favourable tax outcome if it's considered capital in nature.
GST will be payable on developments that aren't ‘capital’. If you develop something and you're going to hold it long-term, and the developer doesn’t rent it out, then you may be able to avoid paying CGT when you eventually sell it. The length of time to hold that property is not crystal clear in legislation - it's in case law.
I've seen things like roughly five years to rent out an asset before you sell it where it's considered a rental property, rather than you selling stock that you've built. You don't want to play around with this stuff - you don't want to say, "Oh yeah, I've rented it out for six months to avoid GST." It just doesn't work like that. GST might be a necessary evil in a way.
There is a bit of saving grace there; If you've purchased your land or your site and it's had GST on it, then you may be able to claim that GST on your purchase. If you’ve heard of the “margin scheme”, it basically says you pay GST on your profit, rather than on the sale price, and that's for benefit if you've acquired a site that you haven't paid GST on.
So let's say you paid $2,000,000 for a block of land and you can't claim GST because it wasn't a GST supply, then the margin scheme (if you can apply it) allows you to just pay the GST on the profit, which is pretty exciting than paying full whack on your sale price.
Stamp duty is a state-based tax and it's paid on the purchase of your site. Keep your buyer in mind - once you develop your property and sell that to the buyer, the buyer will need to consider stamp duty as well. This amount varies from state to state - In fact, I think New South Wales has recently gotten rid of it for certain purchases (which is pretty exciting).
All of these are things you need to work out before you get into it. You need to determine what your tax impact is, and how that plays out in your feasibility.
The last one is land tax, which is state-based again. In Queensland at 30 June, the OSR takes a snapshot of who owns what property at 30 June, and they'll send you a nice little land tax bill. So that can also come into play when you're looking to sell blocks, and selling them before 30 June in a year might mean the difference between paying land tax on that block or not. Keep in mind if you're doing land for instance, when you go on and register your title on that land, if you own that at 30 June, you'll get a nasty bill, versus the block before it was developed would be a lot less land value per square meter.