ATO targets CGT discount TA 2014/1 - Damian
For many taxpayers the difference between a capital gain and
revenue income will amount to lots of tax dollars, whether they are
dealing in shares or disposing of other assets.
For property developers, the dividing line between revenue and
capital can be hazy at the best of times, and the Tax Commissioner
may take differing views depending on whether or not the project
results in a loss or a profit.
Profits from property developments that have been treated as
capital gains are high on the ATO target list right now, and the
Commissioner has now issued a Taxpayer Alert (TA 2014/1) as a
warning of his intention to audit developers to see if they are
accounting for their transactions in accordance with the
Commissioner's party line, with penalties of up to 75% in
The Alert also invites developers to make a voluntary disclosure
before the Commissioner comes knocking, in order to get some
certainty and reduce exposure to penalties.
What is the problem?
The Commissioner is basically saying that he thinks that in some
factual circumstances the correct tax treatment is to return
profits as revenue and not as capital.
While the Commissioner talks about wrongful and inappropriate
claims and exploitation of the system, litigation about the
distinction between capital and revenue has been happening ever
since there were different tax outcomes depending on how profits
Developers Intention - That's the Trap!!!
The recent decision in August v Commissioner of Taxation 
FCAFC 85, focusses on the owners "intentions" (i.e. to
hold or to develop) which highlights the difficulties that
taxpayers face in disputes with the Commissioner. The best legal
arguments about an intention to hold property for long term rental
income can fall apart very quickly if the Commissioner obtains
evidence from a Bank or other sources which show a clear intention
to build, tenant and sell.
In this case what let the taxpayers down was, amongst other
things, that the evidence showed they wanted to copy the successful
strategy of a property developer family friend!!
Onus of Proof
To make life even harder, taxpayers have the onus of proof in
tax disputes. It's not enough to show that the Commissioner has
made some mistakes in arriving at his position.
In a perfect world, property developers get appropriate tax
advice at the time developments are being undertaken, and documents
and actions are evidence of the capital or revenue intention at the
In the real world, there are often conflicts between stated
intentions, activities undertaken and documents and plans provided
to financiers and others, so that when push comes to shove it's
not the clever argument that lets you down, it's the thing that
lawyers always get excited about, the evidence.
What to do
If you have treated development profits as capital gains, the
Commissioner's Alert is a warning that your tax treatment is
likely to come under the microscope. With our extensive experience
in property and tax, we can help you review your tax position
before ATO auditors knock on the door, and if you want, we can
engage with the ATO on your behalf.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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