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ATO guidance on Capital/Revenue in property developments turns on subtle facts

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On 9 July 2018, the Australian Taxation Office (ATO) recently released the Draft Property and Construction Website Guidance (the Guidelines) providing guidance in relation to the ATO position on property development and whether relevant property is held by the taxpayer on capital or revenue account.

The ATO says the Guidelines are to “facilitate consultation between the [ATO]…, tax professionals, industry associations and taxpayers engaged in property transactions.  The guidance aims to provide insight and transparency into our decision making on a range of property development scenarios that we are seeing”. 

The Guidelines have two main sections: 

  1. factors the ATO “takes into account” deciding whether a sale of land is a mere realisation (where property is held on capital account) or a disposal in the course of a business of property development or as part of a profit-making undertaking or plan (where property is held on revenue account); and

  2. twelve examples applying the factors in “real life cases”. The examples run the gamut from large-scale greenfield developments to smaller suburban subdivisions.

Some of the factors outlined by the ATO in the Guidelines include whether:

  • the landowner has held the land for a considerable period prior to the development and sale;

  • the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land;

  • the landowner originally bought the property as an investment, such as for long term capital appreciation or to derive rental income;

  • the property has recently been rezoned and whether the landowner actively sought rezoning;

  • a potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement;

  • the landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements;

  • the landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land;

  • whether the landowner and developer are related entities;

  • the level of financial risk borne by the landowner and the level of control of the landowner over the development; and

  • the landowner has a history of buying and profitably selling developed land or land for development.

Importantly, the ATO appears to accept in the Guidelines that where a taxpayer owns property on capital account and there is a change to revenue account then, depending on the facts and circumstances, that change could be a change of purpose to a profit-making undertaking or plan or the commencement of a business (which brings CGT event K4 into scope).

There had been some speculation that the ATO view may have been that when a change from capital to revenue occurs a business of property development begins (enlivening CGT event K4) so the view in the Guidelines that is not always the case is welcome.

Submissions on the Guidelines are due by 3 August 2018 with the final website guidance expected by the end of August.

Given the nuances between when a development is on either capital or revenue account, with the examples in the Guidelines turning on subtle differences in facts, taxpayers undertaking property developments should seek professional advice on the capital/revenue question.

If you have any questions about the above or the tax treatment of property subdivision and sale in general, please contact:

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  
E: nbrydges@sladen.com.au

Sam Campbell
Associate | Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: scampbell@sladen.com.au

Kelvin Yuen
Lawyer
Sladen Legal
T +61 3 9611 0177
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: kyuen@sladen.com.au

Patricia Martins
Lawyer
Sladen Legal
T +61 3 9611 0138
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: pmartins@sladen.com.au

Neil Brydges