A profit-making scheme is taxed under both regular income tax rules and capital gains tax (CGT) rules. However, there's a rule called S.118-20 that makes sure you're not taxed twice on the same profit.
Here's how it works:
- Apply any specific exemptions, like the main residence exemption or small business 15-year exemption, to reduce the capital gain.
- Subtract the net profit amount from your assessable income. If the profit is more than the capital gain, the capital gain becomes zero.
- Reduce the capital gain further by any capital losses or other CGT concessions.
- If there's still a capital gain left, it's included in your assessable income in the year you entered into the contract to sell the property, not when it's settled.
For example:
Paul bought land for $400,000 in 2000. In 2019, he developed it as part of a profit-making scheme. The land was worth $750,000, and development costs were $450,000 with $20,000 in interest. He sold all lots for $2 million in 2020, with settlements in 2021.
Step 1: Calculate the net profit under S.6-5.
Step 2: Calculate the capital gain.
Step 3: Reduce the capital gain by the net profit.
Step 4: Apply any CGT discounts.
Step 5: Include the net profit in the year of settlement and the net capital gain in the year of contract.
Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.
