If you have a small property development project in mind, there are some essential factors to consider before purchasing that dream block. A range of taxes, duties and other unexpected costs can quickly add up.
Besides the taxation issues discussed below, interest rates, market conditions and the potential for changes to government policies can have a big impact on the financial success of your development. Consider this, if Labor had won this year’s election then negative gearing would have been abolished, and the CGT discount halved on investment properties from January 2020. This had the potential to have quite an impact on house prices moving forward.
Now let's consider the specific taxes and duties relating to your unique development project. You might be surprised; unexpected taxes and charges can cost tens, if not hundreds of thousands of dollars. It’s a scary thought. Fortunately, with the right knowledge, you can save a lot of money and set yourself up for success.
Seeking professional advice is money well spent when you purchase a property for development; you have several options available for how you structure it. The right structure can save you a significant amount of money. Options to consider for structuring your property purchase are:
The structure you choose to purchase your property in can impact access to the main residence exemption, how much GST, CGT and land tax you pay, or your potential to access an exemption from these taxes.
A critical factor to consider when undertaking property development is CGT. A CGT liability can be triggered when you transfer, subdivide or sell a property. The good news is, structured correctly; you may qualify for a capital gains exemption.
Similarly, stamp duty can see you pay a significant portion of your property's purchase price to the government.
A good example of how structuring correctly can save a lot of money is when subdividing a property. For example, say two friends purchase a property with the intention of demolishing the existing premises, then developing a building with two separate residences to be subdivided into their individual names. A normal subdivision would trigger both CGT and stamp duty liabilities for each party, however, if the subdivision is done via a strata title arrangement with a complying partition agreement, then a specific CGT and stamp duty exemption can apply to result in no tax liability resulting from the subdivision. This has the potential to save a lot of money.
Where substantial renovations are undertaken on a property or a new building has been built to replace a demolished premises then it is likely that the development will constitute a ‘new residential premises’ for GST purposes. Where this is the case 1/11th of the sale price would be required to be remitted to the ATO – this again will have a big impact on what profit you’re left with at the end of your project. Even if you rent out your new property after completion GST may still apply on the sale if it was rented for less than five years.
In NSW land tax is payable on the value of land. For eligible entities, land tax only applies to land values above $629,000. Eligible entities are generally individuals, partnerships, fixed trusts and companies. Discretionary trusts do not qualify for the threshold and in fact may need to pay an additional 2% surcharge if the deed does not specifically exclude foreign beneficiaries.
Land tax does not apply to your Principal Place of Residence (PPR) and this can be used to your advantage when it comes to developing a property. Unoccupied land may be exempt under the PPR exemption if the owner intends to use and occupy the property after the build finishes. For clarity, unoccupied land includes vacant land or land on which an existing building is to be renovated or demolished and rebuilt. Subject to certain conditions the exemption applies for four years.
If property development is the right investment strategy for you, and you're ready to take the next step, remember to seek professional advice early in the process. The last thing you want is to find yourself developing a property that isn't going to make you money, or worse still cost you money.
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