Property renovation tax in Australia is assessed depending on three scenarios. First, if you are renovating as a personal property investor. Second, if you are engaged in the profit-making activity of property renovations. And third, if you are carrying on a business of renovating properties. This article discusses each of these scenarios.
IN THIS ARTICLE
Property Investing vs Property Renovating Business
Income tax – property renovating business
GST – property renovating business
Business as a whole
Removal or replacement of all or substantially all of the building
PROPERTY INVESTING VS PROPERTY RENOVATING BUSINESS
If you’re renovating one or more properties, the most important tax issue to consider is whether you are an investor or whether you are carrying on a business of renovating properties.
If you’re an investor, any profit or loss you make falls into the CGT (Capital Gains Tax) regime and you won’t be liable to pay GST. If you’re carrying on a business of renovating properties, you calculate your business’s annual profit or loss in the same way as any business with trading stock and you will likely be liable to pay GST (see below).
The difference between renovating as a property investor vs carrying on a property renovating business is not always clear cut. Generally, though, a property investor holds property for the long term whereas a business of property renovating involves short term buying/renovating/selling. What constitutes short term vs long term can depend on the circumstances. There are no clear time frames as such for either. If you are renovating and selling a house every year or sooner, you are likely carrying on a property renovating business. If you are renovating and selling a house every 2 or 3 years consistently, you may still be carrying on a business, depending on the circumstances.
So, sometimes you could potentially be classed as either, or at least you might have the opportunity to structure your activities to be classed a particular way. If you are borderline between being classed as a property investor vs carrying on a property renovating business, all else being equal, for tax purposes it would usually be better to be classed as an investor if you have held the property for longer than 12 months and have made a profit. The reason is an investor can access the 50% CGT discount if the property is held longer than 12 months. The 50% CGT discount halves the tax on any profit. Whereas if you are carrying on a business, you will usually pay full tax on any profit at your marginal tax rate. However, if you’ve made a loss, as a business you may be able to offset the trading loss against other income sooner, whereas, for an investor, a capital loss can only be offset against another capital gain.
INCOME TAX – PROPERTY RENOVATING BUSINESS
If you are carrying on a property renovating business:
- 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 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
- 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 don’t 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 don’t apply to any income from these properties
- 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
GST – PROPERTY RENOVATING BUSINESS
You may fall within the GST regime if you are conducting an enterprise of renovation to property that is defined as having been substantially renovated. “Substantial renovations” is essential:
renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roofs or staircases.
Whether renovations are substantial depends on the circumstances. The Australian Taxation Office (“ATO”) considers that for substantial renovations to occur, the renovations need to at minimum satisfy both of the following criteria:
- The renovations need to affect the building as a whole, and
- the renovations need to result in the removal or replacement of all or substantially all of the building.
BUILDING AS A WHOLE
For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.
Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building.
REMOVAL OR REPLACEMENT OF ALL OR SUBSTANTIALLY ALL OF THE BUILDING
The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roofs or staircases to be removed or replaced for renovations to be substantial.
The criterion is satisfied where there is a removal or replacement of a substantial part of either the structural or the non-structural components of a building.
Structural work may give rise to substantial renovations in its own right. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced.
However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, both components don’t have to be substantially removed or replaced for substantial renovations to have occurred.
STRUCTURAL BUILDING WORKS INCLUDE
- Altering, or replacing, foundations
- Replacing, removing or altering floors or supporting walls, or parts thereof (interior or exterior)
- Lifting or modifying roofs
- Replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door)
NON-STRUCTURAL BUILDING WORKS INCLUDE
- Replacing electrical wiring
- Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior)
- Plastering or rendering an entire wall or walls
- Plumbing (eg replacing old metal pipes with copper pipes or plastic pipes)
- Removing or replacing kitchen cupboards, bathroom fixtures, etc
- Removing or replacing air-conditioning or security systems.
As part of renovations, work is often undertaken which does not impact the structure of the building but is more like renewing or refreshing what is already there. The ATO considers work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. Cosmetic work includes:
- sanding floors;
- removing and replacing worn or out of date fittings such as light fittings;
- replacing curtains or carpets.
HOW BRISTAX CAN HELP YOU
Property tax is one of BrisTax’s specialist areas. Our tax accountants would be happy to speak or meet with you to discuss your situation. We’ll take the time to understand your circumstances and provide advice that maximises your financial position.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.