ATO warns property developers not to muddy the income /capital divide
The Tax Office has warned property developers against using trusts to return the proceeds from projects as capital gains instead of income.
Profits from property developments that have been treated as capital gains are high on the Tax Office’s target list right now, with the ATO issuing a “taxpayer alert” as a warning about arrangements that display all or most of the following:
- An entity with experience in either developing or selling property, or in the property and construction industry, establishes a new trust for the purpose of acquiring property for development and sale.
- In some cases the trust deed may expressly state that the purpose of the trust is to hold the developed property as a capital asset to generate rental income.
- Activity is then undertaken in a manner which is at odds with the stated purpose of treating the developed property as a capital asset.
- Documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain time frame and the proceeds used to repay the loan.
- Advertising may indicate that the property is available to be purchased well in advance of the project’s completion, including sales off the plan.