KEY AUSTRALIAN TAX CONSIDERATIONS FOR PROPERTY DEVELOPERS

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June 17, 2025 | pwsbuilder |

Property development in Australia can be highly lucrative, but it is also a complex field laden with significant tax implications. From acquiring land to selling developed lots, developers must navigate a web of federal and state tax obligations. Failing to structure transactions and operations correctly can result in adverse tax outcomes, penalties, or lost deductions. This article explores the key tax considerations that property developers in Australia must understand, including income tax, GST, CGT, land tax, and structuring options.

1. INCOME TAX: REVENUE VS. CAPITAL GAINS

A critical distinction for property developers is whether profits are taxed as ordinary income or as capital gains. This classification affects not only the rate of tax but also the availability of concessions and deductions.

  • Property development as a business: If the developer is in the business of buying, developing, and selling property, profits are generally considered ordinary income under Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). In this case, the 50% capital gains tax (CGT) discount is not available.
  • Investment vs. trading stock: Land held for development and resale is often treated as trading stock under Section 70-10. This allows for certain deductions related to the cost of development, but again, CGT concessions are not available.
  • Capital gains treatment: If a property is held passively for long-term investment, any profits on disposal may be treated as capital gains under Section 104 of the ITAA 1997. In these cases, developers might be eligible for the CGT discount if the asset is held for more than 12 months.

Tip: The developer’s intent at acquisition, conduct during ownership, and the scale of activities are crucial in determining tax treatment.

2. GOODS AND SERVICES TAX (GST)

GST, governed by the A New Tax System (Goods and Services Tax) Act 1999, is one of the most significant tax considerations for property developers.

  • New residential premises: The sale of new residential premises is generally subject to GST at the standard 10% rate. Developers must register for GST if their turnover exceeds $75,000 annually.
  • Input tax credits: Developers can claim GST credits on many costs related to the development (construction, materials, professional fees), provided the input tax credit rules are followed correctly.
  • Margin scheme: This concession allows developers to pay GST on the margin (i.e., the difference between the sale price and the purchase price of the land), rather than the full sale price. This can significantly reduce the GST payable, but it must be applied correctly and subject to eligibility.
  • GST withholding: Since July 2018, purchasers of new residential property must withhold GST from the purchase price and remit it directly to the ATO. Developers need to factor this into their cash flow and contracts.

3. CAPITAL GAINS TAX (CGT)

While developers typically pay income tax on profits (not CGT), there are still situations where CGT may apply:

  • Change of intention: If a property initially acquired for investment purposes is later developed and sold, part of the gain may be subject to CGT. The ATO may require a “CGT event” to be recognized at the time the property is moved into trading stock, with the gain taxed accordingly.
  • Subdivision without sale: Simply subdividing land does not trigger a CGT event, but selling a subdivided block likely will.
  • Small business CGT concessions: In rare cases, small developers may qualify for CGT concessions (e.g., 15-year exemption, 50% active asset reduction), but only if strict conditions are met under Division 152 of the ITAA 1997.

4. LAND TAX

Land tax is a state-based annual tax levied on the unimproved value of land. Rates and thresholds vary by state and territory, and exemptions may apply for principal places of residence or primary production land.

  • Multiple properties: Developers holding multiple properties may face aggregated land tax assessments, increasing overall tax liability.
  • Trusts and companies: Entities such as trusts or companies may be subject to higher land tax rates or surcharges, especially in states like Victoria and New South Wales.
  • Vacant land: Additional surcharges can apply to vacant residential land in some jurisdictions to discourage land banking.

Tip: Developers should regularly review their land tax exposure and consider holding structures that minimize liability.

5. STAMP DUTY

Stamp duty (also called transfer duty) is imposed on property transactions by state governments.

  • Off-the-plan and staged developments: Concessions or exemptions may be available for off-the-plan purchases, but eligibility can vary significantly between jurisdictions.
  • Nominee arrangements and sub-sales: These arrangements can trigger additional duty if not structured correctly. Developers must be careful with land options, assignments, and trust acquisitions.
  • Landholder duty: In some states, acquiring shares in a company or units in a trust that owns land may attract duty if certain thresholds are met.

6. STRUCTURING THE DEVELOPMENT ENTITY

Choosing the right entity structure is crucial from both a tax and legal risk perspective:

  • Company: Taxed at 25%-30%, companies provide asset protection and are often used in joint venture developments. However, they are ineligible for CGT discounts.
  • Unit Trust: Popular among developers due to flexibility in profit distribution and access to CGT concessions (if applicable). A unit trust with a corporate trustee may combine benefits of both structures.
  • Partnerships: Less common due to joint liability concerns, but may be suitable for small projects with clear agreement among partners.
  • Discretionary Trust: Rarely used for development due to the risk of losses being trapped, but still relevant where income splitting or asset protection is key.
  • Joint Ventures: Often used in large projects where parties contribute different resources (land vs capital). Requires careful legal and tax structuring to avoid being treated as a partnership for tax purposes.

Tip: Legal and tax advice should be obtained before acquiring property or commencing development to ensure the optimal structure is in place.

7. FINANCING AND INTEREST DEDUCTIONS

Interest expenses on borrowings related to property development are generally tax-deductible under Section 8-1 of the ITAA 1997. However:

  • Deductions may be denied or deferred if the property is not genuinely held for income-producing purposes.
  • Interest capitalization and apportionment are issues when loans cover both private and business use.
  • Thin capitalisation and Division 974 (debt/equity rules) may apply in larger or related-party financing arrangements.

8. RECORD-KEEPING AND COMPLIANCE

Property development involves a high volume of transactions, and the ATO expects accurate and detailed records, including:

  • Acquisition documents
  • Construction contracts and invoices
  • GST returns and BAS
  • Development approvals and council permits
  • Sale contracts and settlement statements

The ATO is increasingly using data matching and property transaction data to identify undeclared income or incorrect GST treatment.

CONCLUSION

Property development in Australia is subject to a wide range of tax obligations that can significantly impact profitability. Developers must carefully manage income tax classification, GST compliance, CGT implications, land tax exposure, and structuring from the outset. Given the high value and complexity of transactions involved, engaging qualified tax and legal advisers early in the development process is essential.

Disclaimer: This document should not be interpreted as tax advice. All information is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.