Simon Ward

Simon Ward

Simon is a Senior Accountant and Director of Finspective. Read More about Simon

July 20, 2021

Get to know the grey areas before you invest

No doubt, you’ve heard a lot of lingo thrown around in the world of tax. While you may grasp the concept of terms like taxable income, capital gains, negative gearing, allowable deductions – it’s misinterpreting the ‘grey areas’ that can prove costly.

I’ve seen it happen on many occasions. It can be the catalysis for poor returns, stressful scenarios or excessive costs.

One such example I’ve come across is the 50% Capital Gains Tax (CGT) discount. To help explain it, here is a scenario where the outcome of a property development can greatly differ due to one misinterpretation:

The Plan:

Anna heard from a friend at the water cooler about a property subdivision they had recently completed. She liked the sound of this as they had made good money on their investment.

Anna then went in search of a suitable property that she might be able to develop too. She found what she was looking for, a nice sized block that she could subdivide and build two townhouses on to sell for a profit.

It would take at least 12 months to build and sell the houses. Anna had heard about capital gains tax and calculated that she would make $200,000 and then only pay tax on $100,000 thanks to the 50% CGT discount. Based on these numbers it was worth her while.

The Misinterpretation:

Anna finished building the townhouses and was on track to make the profits she planned. Unfortunately, she hadn’t factored in that her profits might be taxed on revenue account and therefore not eligible for the 50% discount. She also hadn’t thought about GST.

Anna didn’t realise that even a one-off property transaction could be a ‘profit-making undertaking’, rather than the ‘sale of an asset’. There’s that grey area.

The Result:

This meant she was ineligible for the 50% CGT discount. She also didn’t realise that, as her GST turnover was more than $75,000, she would be required to register for GST and remit 10% of her sales proceeds to the ATO.

Anna still made a profit, but it was a lot less than she planned. It was a lot of risk for the return she received and if she knew this upfront she wouldn’t have down the development.

Understanding your Finances

This is just one scenario of many. While I won’t go into details on ‘50 grey areas’, here are some other common tricky scenarios that I’ve seen which can have wildly different tax outcomes:

  • Whether the profits from an activity are on “revenue” account or “capital” account.
  • Whether someone is running an “enterprise” for GST purposes.
  • Whether someone in an Australian or foreign resident for tax purposes.
  • Whether someone is a share trader or share investor.
  • Whether the income of a service-based business is “personal services income” or “business income”.

Tax is one of the biggest costs of any business and it is often overlooked from the outset. It is critical that any business or activity is costed from the outset, including tax. The key to avoiding costly tax mistakes; to be fully informed and have good information before you make any significant decisions.

The tax legislation is notoriously complex and shaded with grey. Make sure you seek professional advice when assessing any significant financial decision.

The information (including taxation) is general in nature and may not be relevant to your individual circumstances. You should refrain from doing anything in reliance on this information without first obtaining suitable professional advice.

You should obtain and consider the relevant Product Disclosure Statement (PDS) before making any decision to acquire a product.