The ATO sorts people who renovate property into three positions: carrying on a business of renovating properties, carrying out a profit-making activity, or being a personal property investor. Which one applies decides whether the gain is taxed as income or as a capital gain, and whether concessions such as the CGT discount and the main residence exemption can reduce it.
General informationThis sheet sets out how the ATO’s pages on renovating and subdividing describe the three positions. It does not place any project in one of them. Where the position is unclear, the ATO says a private ruling can settle how the income and expenses are treated.
Three positions, side by side
The ATO’s own page on how the difference affects your tax summarises each position. The schedule below keeps to what it and the renovating properties page say, row by row.
| Row | Business of renovating | Profit-making activity | Personal investor |
|---|---|---|---|
| The properties | Trading stock, even if lived in for a short time. | The net profit or loss on the activity goes in the income tax return. | The net gain or loss is a capital gain or capital loss. |
| How the result is worked out | A yearly business profit or loss; the costs of buying and renovating sit in the cost of the stock until each property sells. | Net profit: sale receipts less the costs of buying, holding, renovating and selling. | Sale proceeds less the purchase price and the other costs of buying, renovating and selling. |
| CGT discount and main residence exemption | Do not apply: CGT does not apply to trading stock. | Do not reduce the net profit. | May reduce the capital gain. |
| A loss | Can reduce other income for the year. | A net loss can reduce other income for the year. | Cannot be set against other assessable income; can reduce capital gains that year, or be carried forward. |
| ABN and GST | Entitled to an ABN; may need to register for GST if the renovations are substantial. | Entitled to an ABN; may need to register for GST if the renovations are substantial. | Not an enterprise for GST, and no requirement to register. |
The GST row turns on one word. The ATO defines an enterprise as 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”. On subdividing, the ATO says even a one-off transaction may need GST registration, because it can have the characteristics of a business deal.
The questions the ATO asks
The ATO says the weight of each factor can vary with the circumstances, and lists these questions to ask about property renovating activities:
- “Are they regular and repetitive?”
- “What is their size and scale?”
- “Are they planned, organised and carried on in a business-like manner?”
- “Are they carried on for the purpose of making a profit?”
- “Do you rely on the income you receive to meet your and your dependants’ regular expenses?”
- “Are they of a similar kind and carried on in a similar manner, to the activities of other property renovating businesses?”
A single project can still be caught. In the ATO’s words, someone is “likely to be carrying on a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and you go about the process in a business-like way.”
Four people from the ATO’s examples
The ATO explains the positions through invented people. Their stories are summarised here in brief; the full versions are on the ATO’s pages.
Tony
In the business of property renovation
A carpenter who researches the market, buys a run-down house cheaply, renovates it quickly and sells at a profit, then buys two more, works from a home office and leaves his job to do it. The ATO finds every factor of a business: a profit-making intention, repetition and regularity, and business-like organisation.
Fred and Sally
A one-off profit-making activity
After renovating their own home, they cost out other properties, sell, buy one to renovate and live in, plan the work in stages and sell on completion. The ATO says the work was planned and business-like, the purpose of buying was to renovate and profit, and it resembled other renovation businesses.
Doug
A personal investor, unless he repeats it
He buys a property to rent out, renovates it after work, and sells when the market booms. He did not buy to profit from a resale, did not rely on the sale to meet his expenses, and did not work in a business-like way. If his success led him to do a similar renovation aiming for the same profit, the ATO says he would be in the business of property renovation.
Mary
A personal investor with an exemption
She renovates a run-down house she lives in from the day she buys it, then sells after a work transfer. She lived there the whole time, did not use it to produce assessable income, and the land is under two hectares, so the ATO says the main residence exemption applies.
When the project is land
Subdividing follows the same line between income and capital. The ATO’s subdividing land page says the profit on selling new blocks is ordinary income, not a capital gain, when both of the following apply:
- “your intention or purpose in subdividing was to make a profit”;
- “the profit was made in the course of carrying on a business, a business operation or commercial transaction”.
The page adds that this holds even for someone who is not in business, such as an individual making a one-off transaction, and points to Taxation Ruling TR 92/3 on profits from isolated transactions. The CGT page adds that when the profit is assessed as ordinary income, the capital gain on that land is cut by whatever was already included in assessable income.
GST can follow too. The same page says GST obligations and entitlements may arise when land is subdivided and sold to make a profit, as part of running a business, or as a commercial deal. Sheet 02 sets out when the sale of a home carries GST.
Where the line is hard to see
The ATO’s hub for this subject says that how someone goes about building or renovating, as a one-off or as a regular activity, affects their tax obligations and entitlements. For the GST side, whether a property has been substantially renovated is a separate question, and the ATO points to its ruling GSTR 2003/3 from paragraph 53.
Where a case is complex and the position cannot be worked out, the ATO says a private ruling can be requested to decide how the income and expenses are treated.