Accounting for Property Developers

Property development is one of the most tax-complex activities for Australian SMEs. The interplay between CGT, GST margin scheme, income tax on trading stock, and entity structuring requires careful planning from day one — not at settlement.

1. Capital Account vs Revenue Account

The first question is whether your property activity is on capital account (investor) or revenue account (developer/trader):

• Capital account: You buy, hold, and eventually sell. Profits are taxed as capital gains (eligible for 50% CGT discount if held 12+ months).
• Revenue account: You buy with the intention to develop and sell at a profit. The property is treated as trading stock, and profits are taxed as ordinary income — no CGT discount.

The ATO looks at your intention at the time of purchase, frequency of transactions, and the degree of development activity. If you subdivide and sell regularly, you're almost certainly on revenue account.

2. GST and the Margin Scheme

New residential property sales are subject to GST. You have two options:

• Standard method: GST = 1/11th of the sale price. You claim input credits on construction costs. Best when construction costs are high relative to sale price.
• Margin scheme: GST = 1/11th of the margin (sale price minus original purchase price). No input credits on the original land purchase. Best when land was bought cheaply and has appreciated significantly.

The choice must be made before settlement and documented in the contract of sale. We model both scenarios for clients to determine the optimal approach.

3. Entity Structuring

• Company: Flat 25% tax rate on profits. Good for retaining and reinvesting profits. Limited liability protects personal assets.
• Unit trust: Allows multiple investors. Income distributed to unit holders at their marginal rates.
• Joint venture: Each party accounts for their share independently. Common for larger projects with multiple contributors.

Never develop property in your personal name if the project is significant. The lack of asset protection and inability to manage tax efficiently makes it the worst option.

4. Cash Flow During Development

Development projects have long cash flow cycles — you spend heavily on land, permits, and construction before receiving any revenue. Key tips:

• Stage your funding: Draw down construction finance in stages matching builder progress claims.
• Capitalise interest: Loan interest during the development phase is added to the cost base (not expensed), reducing your future profit and tax.
• Pre-sell off the plan: Secure deposits early to de-risk the project and satisfy lender requirements.
• Track costs meticulously: Every council fee, surveyor cost, architect invoice, and builder claim must be allocated to the correct project.

5. Key Tax Deductions and Considerations

• Holding costs: Rates, land tax, and insurance during the development period — capitalised or expensed depending on your circumstances.
• Professional fees: Architect, surveyor, engineer, town planner, and legal costs related to the development.
• Land tax: Varies by state — developers often face surcharges. Factor this into feasibility calculations.
• Withholding at settlement: Foreign resident sellers must have 12.5% of the sale price withheld at settlement (even if you're Australian, the buyer's solicitor may request a clearance certificate).