The document now includes seven examples that cover the income tax and GST consequences of common property transactions such as property flipping, subdivision, and property development.
In Example 3, the ATO covers a scenario where the taxpayer repeatedly buys, renovates, and sells properties, engaging in market research, seeking professional advice, taking out business loans, and then carrying out renovations in a business-like manner. The ATO takes the view that this is running a business, since the taxpayer’s primary intention is to make a profit from the renovations and reselling of the property. The profits are treated as ordinary income and taxed on revenue account. The CGT provisions don’t apply here since the property is held as trading stock. However, GST doesn’t apply on this particular situation because the taxpayer is supplying existing residential premises which have not undergone substantial renovations.
In contrast, in Example 4, the taxpayer buys a property planning to live in it as their main residence, and renovates it with the assistance of tradespeople when required. However, the taxpayer ends up selling the property due to personal reasons such as losing their job and family illness. Even though there happen to be favourable market conditions when the taxpayer decides to sell, the ATO takes the view that the sale is taxed on capital account because there’s no commercial intent. The sale is not considered part of a business activity or an isolated profit-making transaction. The taxpayer can access the 50% CGT discount, although the main residence exemption wouldn’t apply because the taxpayer never actually lived in the property.
Similarly, the ATO covers two contrasting examples on subdivision.
In Example 5, the taxpayer subdivides the vacant land from their main residence because of ill health and growing debt levels. Since they didn’t initially intend to profit from the subdivision and sale of the vacant land, the sale is viewed as the mere realisation of a capital asset rather than a business venture. The activities related to the subdivision are limited to necessary actions for council approval, reflecting a low level of complexity and small scale.
In contrast, Example 6 covers someone who purchases an investment property with the explicit intention of subdividing the land and selling the lots for profit. The taxpayer engages professionals and enters into a development agreement to oversee the subdivision, actively managing the project. The ATO considers this is clearly a profit-driven, business-like activity, so the profits are treated as business income and taxed on revenue account.
The updated guide builds on other guidance and examples provided by the ATO in this area, particularly MT 2006/1. This provides practitioners with a range of practical resources to refer to when clients are contemplating subdivision or other property projects.