Are you in the business of renovating properties, carrying on a profit-making activity, or a personal investor? The difference affects your tax obligations and entitlements.
This includes, the costs of buying, renovating, selling your property and the receipts from the sale (money or other goods of value).
The degree to each factor can vary depending on individual circumstances.
However, if you acquire a property with the intention of renovating and selling it at a profit, and you go about the process in a business-like manner, you are likely to be carrying on a profit-making activity.
Abbotts have done the hard work for you and broken down how it affects your tax, helping you understand the differences and your obligations.
Property Renovation as a Business
Your position could be summarised as:
Trading Stock:
- Even if you live in the property for a short period of time, the properties you purchase are regarded as trading stock.
- Part of the cost of the properties are held as trading stock until sold (i.e. the costs associated with both purchasing and renovating the properties).
- The costs of unsold properties remain in the closing stock on hand amount.
Profit or Losses:
- The annual profit or loss from your business is calculated by reducing the receipts (i.e. money or other goods of value) from the sale of each property. This is worked out by the cost of the properties sold (after adjusting for the difference between your opening and closing stock), and/or other costs incurred in selling the properties and running your business.
- Your income tax return includes the profits and losses from your business (a loss can reduce your other income for the year).
Capital Gains:
- Capital gains tax provisions (CGT) do not apply to assets that are held as trading stock.
- Concessions such as the capital gains tax discount, small business concessions and main residence exemption do not apply to any income from the properties.
GST and ABN:
- You have or are entitled to an Australian Business Number (ABN)
- If you are conducting an enterprise of renovation to real property that is defined as having been substantially renovated, you may be required to register for the GST.
Property Renovation as a profit-making activity
Your position could be summarised as:
Profit or Losses:
- Your net profit or loss is calculated as the difference between your receipts (such as money or other goods of value) from the sale of the property and the costs incurred in buying, holding, renovating, and selling the property.
- If your tax return includes your net profit or loss.
- Your net profit is not reduced by the CGT discount and the main residence exemption.
- If you do have a net loss, your other income for the year can be reduced.
Capital Gains:
- You can have a capital gain or capital loss from your property, but any amount of net profit or net loss can effectively reduce any capital gain or capital loss included in your tax return.
- Capital gains tax concessions may apply if your capital gains exceed your net profit.
GST and ABN:
- You have or are entitled to an Australian Business Number (ABN)
- If you are conducting an enterprise of renovation to real property that is defined as having been substantially renovated, you may be required to register for the GST.
Property renovation for personal investment
Your position could be summarised as:
Capital Gains:
- If your receipts (i.e. money or other goods of value) from the sale of the property exceed the cost of its purchase (and other costs associated with buying and selling the property), you will make a capital gain.
- If the sale of your property results in a capital loss, this cannot be offset against other assessable invoice.
- You can however, reduce any capital gains made in the same year, or may be carried forward to offset against future capital gains.
- You may apply to reduce your capital gains through capital gains tax concessions such as the CGT discount and the main residence exemption.
- In your income tax return, your capital gain or capital loss is considered when completing the capital gains tax item.
Exemption from capital gains tax:
You may be entitled to an exemption from capital gains tax, such as the main residence exemption.
- The main residence exemption may apply if you occupied a dwelling on your property (as your home or main residence) for the full ownership period, and was not used to produce assessable income (i.e. a business was not operated from it or rented out). Additionally, the land is no more than two hectares (approx.. 4.9 acres).
- A partial exemption may apply if these conditions can only be partly met for your property.
GST and ABN:
- You are not required to register for GST and you are not conducting an enterprise for GST purposes.
- If you are registering for GST, you will not be required to include the receipts received from the sale of the property on your GST activity statement.
Factors to consider when starting out
There are many factors to consider when working out if you are property renovating as a business or a profit-making activity. If you are unsure, consider the following:
- the size and scale of your property renovating activities
- the regularity and repetitiveness
- the nature of the activities (planned, organised, and carried on in a business-like manner?)
- the purpose of the activities (is it to make a profit?)
- the income you, or your dependents receive is reliant on your property renovating activities to meet regular expenses
- your activities are similar, or carried on in a similar manner, to property renovating businesses
If you are considering venturing into property as a business or would like assistance in understanding your position, have a chat to one of our experts at Abbotts.
