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Property developers under scrutiny

Sales of property developments should be declared as income rather than capital gains.

The Australian Tax Office (ATO) will be paying closer attention to property developers, especially those using trusts for the purpose of not declaring income. 

ATO Deputy Commissioner Tim Dyce said in a July 28 press release that the office would be paying closer attention to property developers who undertake any actions that conflict with declared capital investment activities. 

The ATO is especially concerned about trusts being used to turn income from property developments into capital gains. If a property developer is found to be using a special purpose trust for this reason then a penalty of up to 75 per cent of the tax avoided may be incurred by the property developer. 

"The ATO has already raised millions in adjustments from people who exploit the system and our current compliance activity shows we are likely to make many more adjustments in the coming months," My Dyce stated. 

"A growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50 per cent capital gains discount."

Mr Dyce explained that it is important that income from developments is properly provided for under tax regulations and not inappropriately used for claiming concessions from capital gains tax. 

Taxes and Property 

Capital gains tax is the amount you will pay on the profit you make from selling an investment, in this case a property. However, if you are a property developer then this is income and should be declared as such. Proceeds from property development should be treated as income on revenue.

The ATO explained in a Taxpayer Alert on July 28 that trusts are being used to make returns on the capital account following the sale of a property. This means that the sale is eligible for the general capital gains tax discount of 50 per cent. 

If you have set up a trust for the purpose of your business, talk to a property lawyer. They can run you through any possible compliance issues you may have.