Here's the deal with pre-CGT land and some tax warnings:

The calculation of capital gains tax (CGT) is separate from the net profit calculation we talked about earlier. They're only combined in Step 3 to avoid double taxation. Here's how CGT is calculated:

Understanding Market Value: When we talk about the "market value" of land, we mean figuring out its highest and best use. Basically, we look at what the land could be used for that would bring in the most profit. Usually, if land can be split into smaller parts (like for building houses), its value goes up.

Step 1: Calculating Net Profit

Watch out: Selling a property you've held for a long time as a rental might not always be considered a regular sale for tax purposes.

Usually, when you sell a property used for renting or investing, it's seen as simply cashing in on an investment (known as 'capital account'), even if you've fixed it up. That's because properties like these are usually bought for long-term purposes, not specifically to make a profit.

But sometimes, selling a property that's been rented out for a while can be seen as part of a money-making plan or business. This usually happens when there's been a lot of building work involved. One case, called August v FCT [2013] FCAFC 85, shows how profits from selling such properties can be seen as part of a money-making plan.

In the August case, the person bought blocks of land over time, renovated some, built buildings on others, and rented them out. Then, they sold them, including one group of shops.

The outcome: It was seen as a money-making plan.

Here's why: The court didn't believe the person's intention was to hold the properties for the long term, mainly because their story about why they bought and sold the shops didn't add up. Plus, there were inconsistencies in their evidence.

If you have any questions, feel free to contact Tax Ideas Accountants & Advisers. You can also book an appointment through our live calendar.

How Selling a Subdivided Backyard is Handled:

In addition to what we've discussed earlier, here are some more things to consider:

Understanding Land Development Tax Treatment

Determining whether a land subdivision is just selling property or part of a business or profit-making scheme depends on specific factors. Two key cases help understand this:

Understanding "Mere Realisation of a Capital Asset"

In simple terms, the concept of "mere realisation of an asset" refers to making a profit by selling something without actively running a business to generate that profit. When this happens, the profit is treated as a capital gain rather than income, which is usually more beneficial for tax purposes.

For example, selling a property that wasn't intended for business purposes or part of a profit-making plan is considered a mere realisation of an asset. This includes selling a home or a property used for long-term renting, or even selling a building used in your business operations.

Let's take a farming scenario as an example, like the Statham's case. In this case, the executor of a farmer's estate decided to sell off part of the farmland after the farmer's passing. The executor didn't do much beyond basic preparations for the sale, like hiring contractors to handle infrastructure work and listing the land with a real estate agent. Since the executor wasn't actively involved in running a business or making significant changes to the land, the profit from selling the lots was considered a capital gain.

If you have any questions about how this might apply to your situation, feel free to get in touch with Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.

The Kratzmann case, while often cited, doesn't serve as a reliable precedent for many taxpayers. Here's why:

Some people disagree about whether a taxpayer can give up on a plan to make money. They point to statements from previous court cases like Westfield v FCT and Myer's case. These statements suggest that if a transaction is not part of the usual business and the profit wasn't made in the intended way, then it might not be considered taxable income.