Profit making on property development
The ATO set out key factors that are relevant in considering whether a transaction is a business operation or commercial transaction which include, for example:
- The intention or motive of the taxpayer in acquiring the land and in disposing of the land. For example, inherited land that is subdivided and sold is less likely to amount to a commercial transaction than land that is acquired for that purpose.
- The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained.
- The nature and scale of the operation or transaction itself, and the nature and scale of other activities undertaken by the taxpayer (e.g., if the taxpayer carries on property development through another entity, this may indicate the transaction is commercial).
- The personal involvement of the taxpayer in the transaction. Whether or not, and the extent to which, a factor is relevant depends on the circumstances of the case.
TAX WARNING – Construction for resale on ‘revenue account’
Some common examples of transactions involving property that would typically be treated as forming part of a profit-making scheme under TR 92/3 are as follows:
- A taxpayer acquires land with the intention of constructing two townhouses on the land that will be sold upon completion.
- A taxpayer subdivides their backyard and builds a unit on the vacant land that will be sold upon completion.
There is limited scope to argue the sale of such properties is solely on ‘capital account’ (as a ‘mere realisation of a capital asset’) because the developments involve the construction of a dwelling for sale, a large-scale or backyard subdivision, and disposals of property used for rental purposes.