Tax consequences on sales of property

Understanding property sales

Property sales (including subdivided land) that are part of a property development business will be treated as ordinary income.

In other instances, when you sell property that is not part of a property development business, even if it includes your family home, you need to understand when:

• the proceeds from the sale of the property are treated as ordinary income or a capital gain
• an activity is considered to be carrying on an enterprise for ABN and GST purposes.

Income or capital

Your purpose when you enter into an arrangement to purchase, develop or sell the property determines if gains or losses are a capital gain or ordinary income.

Your purpose may:

• include holding the property to derive rental income and to sell for a profit (multiple purpose)
• occur several years after you acquired the property
• change throughout your ownership period.

For a more detailed example on acquiring properties for multiple purposes, see example 7 in our Legal database.

The tax outcome depends on whether the disposal was:

• a simple realisation of the property – the gain or loss is a capital gain or loss
• a disposal undertaken as either part of a:
  • business – the money received is assessable income of the business (see more about issues arising from being in a development business)
  • profit-making undertaking – the net profit is assessable income.

It's likely that any gain will be a profit for income tax purposes and not just a capital gain if your activities leading up to a sale look like either:

• a commercial transaction
• part of an arrangement to make a profit beyond the appreciation in the value of the land only.

For more detailed examples on whether the disposal of subdivided land is the simple realisation of the property, see examples 5 and 6 in our Legal database.

If property is purchased as a capital asset, and there is a change in intention, the ultimate overall gain should be split between a capital gain and ordinary income.

It is only the net profit you make from your profit-making undertaking that will be assessable as ordinary income. Any capital gains will be assessed under the capital gains tax (CGT) rules.

GST consequences

You may have GST obligations and entitlements if you sell property:

• with the intention of making a profit
• while carrying on a business
• as part of a business or commercial transaction.

Where the gain or loss on the sale is considered to be ordinary income for income tax purposes, the sale will be:

• part of an enterprise for GST purposes
• included in calculating your turnover for GST registration purposes
• subject to GST if you exceed the GST registration threshold or are otherwise already registered for GST.

Where the gain or loss on the sale is considered a capital gain, you may still have GST consequences on the sale if you:

• used the land in an enterprise you were carrying on – the sale of the property will be a sale undertaken as part of that enterprise
• are registered or required to be registered for GST – your sale may be subject to GST.

If your gain or loss is capital because you merely realised the property value and didn't use the land in an enterprise, your sale will generally not be subject to GST.

If you are required to pay GST, you can claim a credit for any GST included in the price you pay for things you purchased to make the sale. You must be registered for GST to claim a credit.

Factors to consider

When you acquire the property as a home, farm or other capital asset, your purpose and the steps you take to sell the property determines whether the gain for income tax purposes is either:

• a capital gain
• ordinary income from a profit-making undertaking.

The following factors will help you work out the tax treatment:

• type of entity making the sale
• types of activities you're involved in
• costs incurred prior to the sale
• complexity and steps undertaken
• parties and phases involved
• your relationship to other parties involved in the sale
• your purpose in buying the land
• timing and steps undertaken for the sale

This information is a guide only and provides additional detail in general terms for each of the factors in Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income.

When considering the income tax and GST implications of your property sale, it is important to weigh all the factors together and not consider them in isolation.

The type of entity making the sale

To help determine if the property sale was commercial in nature and what the tax consequences are, consider the:

• type of entity involved in your property sale
• reasons for undertaking it.

Regardless of your structure, you are more likely to be carrying on a commercial business deal when you:

• engage a developer to carry out a development activity for a fee
• share in the profits from the sales with the developer.

A property sale is more likely to be a capital gain if you:

• are an individual and the sale was driven by personal reasons - for example, a simple land subdivision and sale of part of land you no longer need
• don't have a history as a developer
• own or control a business and it doesn't carry out any land dealing or development activities.

A property sale is more likely to be ordinary income if a business entity (such as a partnership, trust, company) is established, acquires property with the intention of making a profit and enters into a property development.

The types of activities you're involved in

The types of activities you are involved in (not including the property sale in question) can help to determine if the activity was part of a profit-making undertaking.

The sale of the property is more likely to be a capital gain if you:

• aren't engaged in business, or your business activities aren't related to property development or property transactions
• haven't previously been involved in commercial property transactions or developments in any capacity
• originally acquired the land primarily for investment purposes only, such as to earn rental income.

The sale of the property is more likely to be ordinary income if you:

• have had previous commercial property transactions
• operate a business related to property development, construction, or sale
• originally acquired the land with an intention to undertake development activities.

For more detailed examples on property flipping, see examples 3 and 4 in our Legal database. For further information see Are you in the business of renovating properties?

The costs incurred prior to the sale

The costs incurred can help to determine if the activity was commercial in nature.

The sale of the property is more likely to be a capital gain if:

• the development cost is low compared to the value of the undeveloped land
• you were exposed to minimal financial risk in undertaking the activities leading to the sale.

The sale of the property is more likely to be ordinary income if:

• the development cost is significant compared to the value of the undeveloped land for example, attributable to building on the land
• you were exposed to significant financial risk in undertaking the activities leading to the sale for example, mortgaging the land to finance the activity.

For more detailed examples on one-off development activities, see example 2 in our Legal database.

The complexity and steps undertaken

The complexity and steps carried out to prepare the land for sale can help to determine if the activity was commercial in nature.

The sale of the property is more likely to be a capital gain if:

• it is a single transaction
• it is the sale of an unimproved block
• the cost of development is low compared to the value of the undeveloped land.

The sale of the property is more likely to be ordinary income if:

• the land was purchased for the purpose of subdivision and sale – an indication of this is if you sought approvals soon after the land was acquired
• the land sale involved significant improvements – for example, to improve its condition to maximise profit, or the construction of houses, other buildings, roads or other community services
• the overall project involved the purchase and development of neighbouring blocks
• the development activity was subject to a decision by a government authority to rezone the land, that you or related parties lobbied for
• the costs of development are significant compared to the value of the undeveloped land.

The parties and phases involved

In determining if the sale of property is commercial in nature, it is necessary to consider whether the sale occurred in phases over a period of time, involved multiple parties or a series of transactions.

The sale of property is more likely to be a capital gain if:

• it is a straightforward one-off transaction between you and a purchaser
• the only element of the arrangement is an agreement to transact and sell land in its existing state
• there are no other parties involved in finalising the sale (except for real estate agents and conveyancers)
• if you were approached by a third party to facilitate a sale, rather than actively marketing the property.

The sale of property is more likely to be ordinary income if:

• you transacted with multiple parties (such as architects, property developers and consultants) through various agreements to prepare the property for eventual sale
• the sale relied on a number of additional steps and was significantly more complex than a standard residential sale
• you engage a developer to carry out a development activity for a fee.

Your relationship to other parties involved in the sale

Your relationship with others involved in the sale can help to determine if the activity is commercial in nature and treated as ordinary income.

The sale of the property is more likely to be a capital gain if the:

• type of parties involved were limited to those such as real estate agents, conveyancers and surveyors
• arrangement is non-commercial and more in the nature of a family dealing (such as selling a granny flat previously used by a family member).

The sale of the property is more likely to be ordinary income where professional third-party experts (such as architects, developers and consultants) act on your instructions, their business activities are taken to be your activities.

Your purpose in buying the land

The purpose for entering an arrangement to develop and sell land may occur several years after the land was acquired. The purpose may change throughout the ownership period.

If you purchased the land for sale and didn't use it for any other purpose, the transaction was commercial in nature and ordinary income.

The sale of the property is more likely to be a capital gain if the land was purchased:

• exclusively for private purposes, such as your family home or holiday home, and was held for a significant period
• as a rental investment property that was held for a significant period
• as a farm for the purposes of carrying out farming activities.

The sale of the property is more likely to be ordinary income if the land was purchased:

• to be developed
• for land banking (holding for future development).

For more detailed examples on residential suburban developments, see our Legal database.

The timing and steps undertaken for the sale

The length of time you own the land can help to determine if the property sale is commercial in nature and treated as ordinary income.

The sale of the property is more likely a capital gain if the land is owned for a significant period and used, for example, as a house or farm. This is evidence you acquired the land for those purposes.

The sale of the property is more likely to be ordinary income if the land was owned for a short period before being sold.

Evidence to determine intent and purpose

Even when a property sale involves your family home, you need to keep evidence of the sale process.

Written records are the best evidence of your purpose and intention and are much more valuable than what you can remember in hindsight.

Further assistance

This information provides general examples that illustrate principles described in:

• Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income
• Miscellaneous Taxation Ruling 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

See additional Examples of tax consequences on sales of land including small-scale land subdivision on our Legal database.

For more information about property see:

• Subdividing land
• Are you in the business of renovating properties?
• GST and property

If your circumstances are not fully covered here or you are unsure how it applies to you, contact us or seek professional advice. You may also apply for a private ruling.