If you've acquired vacant land (either for private purposes or as an investment), it's usually considered a capital asset subject to capital gains tax (CGT). But if you purchase the land for use in a business activity that deals in land, it's considered trading stock. In this case, any sale proceeds are treated as ordinary income, and you may need to register for GST.
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Determining whether capital asset or trading stock
Land is treated as trading stock for income tax purposes rather than as a capital asset if:
- you have begun a business activity that involves dealing in land, or
- you hold the land for the purpose of resale.
Business activities that involve dealing in land include:
- acquiring land to develop or subdivide and sell
- acquiring land for the purpose of building a dwelling or commercial property and selling the developed property.
This can be the case even for a one-off transaction. It's not necessary that the acquisition of land be repetitive – a single acquisition of land for the purpose of development, subdivision and sale by a business begun for that purpose would lead to the land being treated as trading stock.
The business activity is taken to have begun when you embark on a definite and continuous cycle of operations designed to lead to the sale of the land.
Land as a capital asset
Vacant land that is a capital asset is subject to the same capital gains tax rules as other properties. When you sell it, you'll need to work out your capital gain or capital loss and pay tax on any capital gain.
Keep records of the date and cost of obtaining the land, and your ongoing expenses, such as council rates and loan interest. These expenses can be added to the capital cost of the land for the purposes of working out your capital gain or capital loss when you sell it.
Income tax deductions
For land treated as a capital asset, you generally can't claim income tax deductions for expenses associated with owning it – such as interest on an investment loan – because the land does not generate income. When selling the land, you can add these expenses to the capital cost to work out any capital gain or capital loss.
However, if you buy vacant land with the aim of building a rental dwelling on it, you can claim tax deductions for expenses such as loan interest and council rates. To be entitled to these deductions, you must build the dwelling in a reasonable period of time and make it available for rent as soon as it's completed.
Land as trading stock
For vacant land that is trading stock, capital gains tax doesn't apply. Proceeds from the land are treated as ordinary income (not a capital gain) and associated costs are deductible.
GST treatment of land as trading stock
If you are dealing with property, including one-off transactions, you may be considered to be carrying on a business or a commercial venture and need to register for GST.
Once registered, you need to include the GST in the price of the goods you sell, including vacant land, commercial and commercial residential premises and new residential premises. You'll be able to claim credits for the GST included in the price of most of your business purchases, subject to normal GST rules. You'll also need to report these transactions by completing a business activity statement.
If you've acquired vacant land (either for private purposes or as an investment) it's usually considered a capital asset subject to CGT. But if you purchase land for use in a business activity that deals in land, it's considered trading stock, in which case any sale proceeds are treated as ordinary income, and you may need to register for GST.