• How the difference affects your tax

    The treatment of the costs of buying, renovating and selling the property and receipts (such as money or other goods of value) from the sale of the property that are included in your income tax return will vary depending on whether you are:

    Carrying on a business of property renovation

    If you are carrying on a business of property renovation, your position may be briefly summarised as:

    • The purchased properties are regarded as trading stock (even if you live in the property for a short time).
    • The costs associated with purchasing the properties, and in renovating them, form part of the cost of the properties which are held as trading stock until sold.
    • The costs of unsold properties remain in the closing stock on hand amount.
    • You work out your annual profit or loss from your business by reducing the receipts (such as money or other goods of value) from the sale of each property by      
      • the cost of the properties sold (after adjusting for the difference between your opening and closing stock)
      • other costs incurred in selling the properties and running the business.
    • Your business profit or loss is included in your income tax return (a loss can reduce your other income for the year).
    • The capital gains tax provisions (CGT) do not apply to assets that are held as trading stock. Further, capital gains tax concessions such as the capital gains tax discount, small business concessions and main residence exemption do not apply to any income from these properties.
    • You are entitled to an Australian business number (ABN).
    • You may be required to register for the GST if you are conducting an enterprise of renovation to real property that is defined as having been substantially renovated.

    An enterprise is an activity or a series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

    Carrying out a profit-making activity

    If you carried out a profit-making activity of property renovation, your position may be briefly summarised as:

    • Your net profit (or loss) is included in your income tax return – it is calculated as the difference between your receipts (such as money or other goods of value) from the sale of the property and the costs incurred in buying, holding, renovating and selling the property.
    • The CGT discount and the main residence exemption do not reduce your net profit.
    • If you make a net loss, it can reduce your other income for the year.
    • You can also make a capital gain or capital loss from the property – however, your capital gain or capital loss is effectively reduced by any amount of net profit or net loss included in your return.
    • In the unusual case that your capital gain exceeds your net profit, other capital gains tax concessions may apply.
    • You are entitled to an ABN.
    • You may be required to register for the GST if you are conducting an enterprise of renovation to real property that is defined as having been substantially renovated.

    An enterprise is an activity or a series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

    Personal investor

    If you are a personal investor, your position may be summarised as:

    • You will make a capital gain if your receipts (such as money or other goods of value) from the sale of the property exceed the cost of its purchase and other costs such as those associated with buying and selling the property.
    • A capital loss from the sale of your property cannot be offset against other assessable income, but can reduce any capital gains that you make in the same year, or may be carried forward to offset against future capital gains.
    • Capital gains tax concessions such as the CGT discount and the main residence exemption may apply to reduce your capital gain.
    • Your capital gain or capital loss is taken into account in completing the capital gains tax item in your income tax return.
    • You are not conducting an enterprise for GST purposes.
    • You will not be required to register for GST.
    • If you are registered for GST, you will not be required to include the receipts received from the sale of the property on your GST activity statement.

    If you are a personal investor, you may be entitled to an exemption from capital gains tax for your main residence.

    Are you entitled to an exemption from tax?

    If you are a personal investor, you may be entitled to an exemption from capital gains tax. One of the most common exemptions is the main residence exemption.

    If the property had a dwelling which you occupied as your home (main residence), a full main residence exemption is likely to apply if the dwelling:

    • is your home for the full period you own it (ownership period)
    • has not been used to produce assessable income – for example, a business is run from it or it is rented out
    • is on land that is not more than two hectares (approx. 4.9 acres).

    If these conditions apply only partly to your property, a partial exemption may apply.

    The capital gains tax property exemption tool can help you work out your proportion of main residence exemption.

    Example: Personal investor entitled to an exemption from tax

    Mary is an advertising executive. She buys a run-down property that is located close to her workplace and moves in straight away. Over the following few years she has a new kitchen and bathroom put in, an internal wall removed to create more space and paints the house inside and out.

    Due to a work transfer, Mary sells her home. Although Mary is a personal investor, she has lived in the property for the entire time she owned it, she has not used it to produce assessable income, and the land area is less than two hectares. Therefore, she is entitled to the main residence exemption from CGT.

    End of example

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      Last modified: 03 Aug 2017QC 18014