As we are a business that deals with both property developers and investors (and people that do both) we are often asked about Tainting, what does it mean and how does it work. It is a particularly important topic to understand for anyone considering getting into property development as it will effect any other property positions they have.
We explore below alongside BetterCo what tainting means and how it might affect you. To note, we strongly encourage you to get tax advice from a qualified accountant (like BetterCo) and the below is not classed as personalised advice.
What does it mean?
In very simple terms tainting refers to the tax position for an individual when they are classed as someone who intends to make an income from the disposal of property. When someone is classed as above they are taxed at their marginal tax rate on all profits they make from the sale of property. This is whether it is a capital gain on the sale of an investment property or profits from the redevelopment of a property.
Who does this definition capture?
If you acquire a property with the intent of realising income from the sale of that property then you would be captured under the tax legislation. In general this would capture a developer, builder, or trader of property.
Note, the key word above is intent. If you buy an investment property and after 5 years renovate it and sell it you wouldn’t necessarily be considered a property trader as your original intent would be as an investment. However, always seek tax advice before making a decision.
How much do I get taxed?
You will be taxed at your personal tax rate on the profits from the sale of the property. This will very much depend on your overall income and therefore marginal tax rate (i.e. if your total personal income is greater than $180,000.00 then you will be taxed at 39%.).
It will also depend on the profit from the property trade.
Is it across all my properties?
Yes, except for your owner occupied home which is exempt.
Your tax position normally originates from your intention at the time of acquisition of the property as mentioned above. However, if you acquired an investment property say 5 years ago then acquired a site to develop your tax status would then change to a developer / trader and you would be captured under the tainting tax rules. If you then sell the investment property during the period you are a developer you will be taxed on any profits (capital gain) you made on that asset.
This applies to all properties you own outside of your own home and is therefore crucial to plan ahead if you are an investor considering moving into development.
What if I own a property with a trader / developer? Will I be tainted?
Yes. Unfortunately the act extends to those associated with the property developer or trader and therefore the full property is subject to tax.
How do I avoid it?
The simplest way to avoid being tainted is to avoid doing any property trading or development. However, if you are going to move into doing some property trades of development then you will become ‘tainted’.
It is important to note, however, that if you cease those activities and return to solely being an investor you can change your status in that next tax period.
As above, we highly recommend you seek personal tax advice from a professional.
Please don't hesitate to reach out if you have any questions!
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