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If you have caught the property development bug, you’ll know how fulfilling it can be to recognise the value in a piece of land and transform it into one or more homes that buyers love.
However, along with the many challenges of developing new dwellings comes the complexity of legal and tax requirements. You need the help of a number of specialists to streamline the process and make sure your property development business is fully compliant with regulations.
The financial and legal things to keep in mind include property exchange contracts, accessing finance, paying all your bills on time and getting all the relevant approvals in place. There is also the need to handle your tax obligations.
Here are some need-to-knows when it comes to tax and developing property.
Tax tips for property developers
Tax applies to the development and sale of property but knowing how much you will have to pay can be confusing. Here are some things to do and be aware of.
Get organised
Even if you’re developing property on a very small scale, you need to keep track of your expenses. This will firstly benefit you because you’ll be able to see how much you are spending and determine how much of a profit you have made at the end of the project. You’ll also be able to check how much you have spent on all the different providers, contractors, materials etc, which can help you to improve results on your next project.
When you’re organised and only use specific accounts, and when you connect them to a cloud-based accounting system, you’ll be able to easily share everything with your accountant. This will make things so much easier for everyone when tax time rolls around.
Check if you need to register for GST
In Australia, you have to pay GST if you earn more than a certain amount per year through the sale of goods and services at an enterprise level. The threshold for this is $75,000 and most property developers do exceed it.
Check if you will need to register for GST as you will have to pay it when you sell the properties you develop. The good news is you should be able to offset the costs by claiming GST credits for the costs incurred while developing the property.
It can be tricky to figure out exactly how much GST you owe, which is why you need to work with an accountant who understands your industry and can ensure you’re claiming all the applicable credits.
If you’re an individual property developer and you’re not sure if you qualify to register for GST because of your income, reach out to your accountant. It’s best to know ahead of time if you will need to factor this cost into the sale of the property you develop.
Define your development
Your property development project is going to fall under one of two categories:
- A profit-making scheme
- A capital gain
If you buy a property with the sole intention of developing and selling it for a profit, then your property developing business is considered a profit-making scheme. When you sell the property, it will be taxed as revenue, similar to a business income.
Capital gain applies to lower scale projects. If you buy a home to renovate and sell as a personal project, you will still need to pay this tax.
Get familiar with Capital Gains Tax
Capital Gains Tax applies to property sales in Australia. This is basically unavoidable, so you need to factor it in as an expense and understand that this is part of the process.
Capital gains refers to the rise in the value of a capital asset like an investment or property, that gives it a higher worth than the purchase price. This gain is realised when the asset is sold.
If you want to minimise capital gains tax, you may be able to utilise superannuation concessions or be strategic about the financial year when you sell. Talk to your property development accountant for guidance in this area as different rules apply to different situations.
Maximise tax deductions
If you hold onto the property you develop as an investment and rent it to tenants, you may be able to write off the depreciation of some of the money you have spent. Your accountant can guide you in the right direction to have a depreciation schedule created.
If you do plan to sell immediately after building the home/s, you won’t be able to claim depreciation, however having a depreciation certificate prepared to hand to potential buyers can be a tax-deductible expense.
Other potential tax deductions include the money you spent developing the property, including:
- The cost of the land you purchased
- The cost of designers/architects
- Materials
- Contractors
Again, this is why it is important to keep track of expenses. By declaring them and having clear records, you’ll be able to minimise tax.
When it comes to property development, paying tax is a given. There’s no point trying to avoid it completely and it’s better to see a tax bill as a sign you have made money. Connect with a property specialist accountant early so you can be clear on how tax will factor into your final figures.
Reach out to Crest Accountants today for help with property development tax management and returns.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
