Property has long been a popular source of wealth creation in Australia, but from a tax perspective, not all property activities are treated equally. Whether the Australian Tax Office (ATO) considers you a long-term investor or a property developer can have a significant impact on your tax obligations including whether profits are subject to Capital Gains Tax (CGT), income tax, or even Goods and Services Tax (GST).
In recent years, the ATO has kept a close eye on the property and construction industry. According to the ATO, this sector continues to represent a significant source of tax risk, with audits frequently targeting developers who incorrectly report their activities as investment. For taxpayers, this highlights the importance of understanding the difference between “investment” and “development” and ensuring your reporting aligns with the ATO’s expectations.
Investment vs Development – Key Differences & Tax Implications
The key differences often come down to intention and activity.
| Investment | Development |
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If a property is acquired with the intention of generating rental income or capital growth, it is treated as a capital asset. Gains made on disposal are subject to CGT and if held for more than 12 months, investors can access the 50% CGT discount (for individuals and trusts) or 1/3 discount (for SMSFs). Main residence and other exemptions may also apply, such as some SBE CGT concessions if connected to a small business. |
If a property is acquired with the intention to subdivide, develop or sell in a commercial manger, the ATO is more likely to treat is as a business or profit-making activity. In this case, the property is considered trading stock, with profit taxed as ordinary income rather than capital gains. This means there is no access to CGT discounts. In many cases, GST would apply, requiring registration and compliance. The main risk is that many taxpayers assume they are investors, only to find the ATO reclassifies their activity as development. This can result in the loss of CGT concessions, unexpected GST liabilities, and significant interest and penalties. |
ATO Traps and Case Studies
The ATO regularly publishes warnings about common mistakes in the property sector. Some traps include:
- “Accidental developers”: A mum-and-dad investor subdivides their backyard and sells a block. Even though they saw themselves as investors, the ATO may determine the subdivision and sale amounts to a development activity, triggering GST and income tax.
- Incorrect GST treatment: Developers who fail to register for GST or incorrectly apply the margin scheme on sales.
- Poor record keeping: Not documenting the original intention behind acquiring the property, leaving taxpayers exposed in an ATO review.
The ATO has flagged the property and construction industry as a key focus area for audits and according to its compliance updates, risks include unreported income, omitted GST, cash economy practices, and misuse of deductions.
Minimising ATO Review Risk
The fundamental ways that property owners and investors can ensure they are doing the right thing are:
- Getting the purchasing/owner structure right from the start, as structures have different tax and asset protection outcomes.
- Clarify your intention and keep records.
- Seek advice before subdividing or developing, as even one-off projects can trigger developer treatment.
- If you are developing property, ensure GST registration, reporting, and margin scheme eligibility are addressed upfront.
- Maintain strong record-keeping, as it can be critical in supporting your position in the event of an ATO review.
For More Information
With increased compliance focus on the property and construction industry, getting this classification wrong can lead to unexpected tax bills, denied concessions, and potential penalties.
Whether you’re considering your first subdivision or managing a portfolio of rental properties, the safest strategy is to seek advice before you act.
If you’re planning a property development, subdivision, or even considering selling part of your investment portfolio, it’s essential to get the tax treatment right from the start.
For more information and assistance in understanding tax treatments attached to Property Development and investment, please contact the adviser team at Archer Gowland Redshaw - (07) 3002 2699 | info@agredshaw.com.au.
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