The ATO has published draft guidance to help determine whether the sale of a property is the mere realisation of a capital asset or a disposal in the course of carrying on business or a one-off profit-making venture.
Recent guidance from the Australian Tax office has confirmed that whether a property sale is 'mere realisation' or something more is determined by examining and weighing all facts and circumstances around the sale.
Whether it's a mere realisation of a capital asset (taxable as a capital gain) or a disposal in the course of carrying on a business or one-off profit-making venture (both taxable on revenue account), the ATO indicates that taxpayers should refer to an extensive list of factors, including but not limited to:
- Whether the landowner has held the land for a considerable period prior to the development and sale
- Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
- Whether the landowner originally acquired the property as a private residence or for recreational purposes
- Whether the landowner originally acquired the property as an investment, such as for long-term capital appreciation or to derive rental income
- The landowner was unable to find a buyer for the land without subdivision
- The landowner applies for rezoning and planning approvals around the time or sometime after the acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
- The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
- The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
- The landowner has a history of buying and profitably selling developed land or land for development
- The operations are planned, organised and carried on in a businesslike manner
- The landowner has changed its use of the land from one activity to another (e.g. farming to property development)
- The scope, scale, duration and degree of complexity of any development
- The level of active involvement of the landowner in any development activities
- The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
- The value of the development or other preparatory costs relative to the value of the land
The draft guidance includes a range of examples dealing with different types of property activity and how the ATO would treat the activities from a tax point of view.
The guide also discusses different types of property development agreements that landowners typically enter into with other parties and explains how to determine whether the arrangement gives rise to a partnership, a joint venture or some other contractual arrangement.
If you're currently involved in property development or selling land, it is important you speak to your accountant to discuss how this review may impact your property sale and how it may be taxed.
Contact us on 02 9957 4033 for more information.