Slicing and dicing an existing block of land so you can create a new property (or properties) has historically been a tried and true development formula for success in Australia.
However, if you’re considering diving into property development for the first time, there are a number of factors you need to take into consideration. Just like any other investment strategy, the decision to move forward requires careful thought – not to mention, a great group of experts around you.
Obviously, you have to invest in research so you can gain knowledge about the property developing process and potential profits. You also have to consider the location and see if it fits the demographic you’re going after with your project. Laws, rules and regulations may vary depending on your state or territory, so it’s essential that you educate yourself about all relevant restrictions.
As your conveyancers, we can help provide you with the legal guidance and expertise you require to effectively manage your property development project. Keep in mind that you will need a number of other qualified experts on your team, including a builder, town planner and an accountant.
An accountant is as essential as the rest of your experts, because one of the biggest conveyancing considerations you must be aware of when developing are the taxes. From a legal standpoint, you need to get in front of them at the beginning of the project – or risk costly mistakes at the end.
Most commonly, issues arise around capital gains tax (CGT) and goods and services tax (GST). Take a look at these two tax types and how they might affect property development:
Capital Gains Tax (CGT)
CGT is a tax levied on the profits you make when you sell a property. Whatever gain you make on the sale of a CGT asset is considered a capital gain and should be included in your assessable income for that financial year’s income tax.
As a property investor, you’re eligible for a 50% discount if you’ve held onto a property for longer than 12 months. However, once you decide to develop the property with the intention of selling it, your property purpose changes from being ‘a capital asset’ to being ‘trading stock on hand’.
This change in property purpose means that you won’t be eligible for the 50% CGT discount – even if you’ve held the property for more than 12 months and are receiving rental income from it.
Goods and Services Tax (GST)
As a day-to-day property investor, you don’t need to concern yourself with GST. But once you make the leap from being a property investor to a property developer, GST is one of the additional taxes you may need to pay.
GST is a broad-based tax of 10% on most goods, services, and other items consumed or sold in the country. As a developer, you are creating a new product, which will be subject to GST.
Before you register for GST, you need to make sure that the specific development you’re going to create is taxable. In general, you need to register for GST if you build new residential premises for sale. If you’re just subdividing land that you’ve held long-term solely for rental purposes, then you may not need to register for GST. You can also claim GST credits for any construction costs related to the sale.
To further complicate matters, you may be able minimise your GST payable by applying the margin scheme, which is based on the difference between the purchase price and the sale price. When you use the margin scheme, you become entitled to claim any GST credits you have paid to your suppliers.
As you may be starting to appreciate, there are a number of complex rules and regulations guiding your development, so it’s important to work with the right conveyancer and accountant from the outset, so you can be guided accordingly. For an obligation-free chat about your project with our friendly team at Think Conveyancing, contact us on 1300 932 738, or request a free quote online.