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Think tax when considering property development

We are often asked about the possibility of sub-dividing the backyard, building another dwelling on it and walking away with a life-changing profit. Along with quite a few other scenarios, if you are considering any sort of property development, we urge you to seek our advice to help you understand your options and the implications. A recent ruling by the Administrative Appeals Tribunal (AAT) illustrates some of the complications.

New or not new?

GST does not normally apply to the sale of residential properties unless they are “new residential premises.” In essence, according to the GST rules a newly constructed residence will not be regarded as new, for the purposes of GST, if it has been rented out for five years.

However in a recent case a person acquired four properties between 2003 and 2007, built dwellings on them and then sold them over a period of 20 months starting in 2011. The ATO decided that the sales of each of the properties should be treated as sales of new residential properties. When appealed by the seller, the AAT agreed with the ATO.

Of particular note to the AAT was that at times the dwellings had been simultaneously marketed for sale whilst being leased. There were also periods where they were without tenants. Additionally, none of the dwellings were used only for rental for a five year period.

Before you start

Making money through property development is not straight forward. The tax implications alone can significantly affect the final outcome. It is possible to minimise the amount of tax you pay on these transactions but it is vital you consult us before you commence. Even half way through or particularly, just before you sell, may be too late to avoid very significant tax bills.

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