Tax and property
There are a variety of taxes and other imposts involved in property development and/or investment. This may include:
- duty and GST on the acquisition of the property;
- land tax whilst holding the property; and
- income tax and GST on the eventual sale of the property.
How you are taxed is an important input into any meaningful feasibility study, as is the timing of these outgoings in order to accurately forecast cashflows and/or debt drawdowns.
Tax issues for property developers
Property developers are generally taxed under the trading stock regime or under ordinary income/revenue rules.
As such, the choice of structure is important, particularly in order to adopt a structure that provides a measure of asset protection and the ability to trap surplus profits not required for personal reasons in a tax-effective manner ready for re-deployment into the next project.
Tax issues for property investors
With property investors, the choice of structure is equally important as the financial feasibility, for example, given Australia’s house prices and rental yields, many investment properties are negatively geared, however, notwithstanding the asset protection and distribution flexibility of a discretionary trust:
- any losses are trapped in the trust and cannot be distributed out to the beneficiaries to offset their income from other sources (although they may be carried forward subject to loss testing rules);
- in NSW, they are not eligible for the land tax-free threshold (meaning that they pay land tax from the first $1) which can increase the negative gearing losses which has to be funded from other sources.
Understanding these structuring issues, the tax and duty issues unique to each and how they impact you in your particular circumstances is the key to identifying which one suits you and why.”