We hear about the property investor all the time, but have you heard of the elusive property trader? Many people often proclaim themselves to be investors, though seldom do they say they are trading in properties.
Sometimes known as a property speculator, a person who trades in property is one who tries to gain income through purchasing property, and then selling it after a short period of time when the property has received significant capital gains or after renovations.
A property investor in comparison is someone who buys into property with the intention of renting it out or producing long-term capital growth. In juxtaposition, an investor typically holds on to a property for longer than a trader. It is important to know the differences between the two, as there may be implications for capital gains tax (CGT), income tax and GST.
Property traders looking to renovate before reselling may be subjected to registering for GST if the renovations are substantial. If a once-off profit-making activity, you must report in your income tax return and what the net profit or loss from the renovation was.
However if you run a business of ‘flipping’ properties, the purchased properties are regarded as trading stock, and the costs associated with buying and renovating them form part of the cost of your trading stock until they're sold. Even if you have lived in one of the properties for a short period, CGT doesn't apply to these assets held as trading stock, and concessions such as the CGT discount, small business concessions and main residence exemption don't apply to any income from the sale of the properties.
With this in mind, the important principle about the distinction between trading and investing is intention. Somebody’s intent is the fundamental way to determine what sort of transaction is involved, not simply the bare facts such as the time between purchase and sale. If you can show you bought the property intending to hold it for its income, the fact that you sold it as a result of getting a good offer shortly afterwards doesn’t necessarily redefine the transaction into one of trade.
This article was written by Oren Flamm, the General Manager at Hodges Caulfield.