Recent figures released by the Australian Bureau of Statistics suggest that $18 billion was spent on renovations in the quarter up to September 2016, setting a new record.
While in the past majority of renovation spend has previously been attributed to private renovations, recent growth has been caused by the increase in number of people house flipping, according to H&R Block.
House flipping is a process whereby individuals buy a property, renovate it and sell it on for a profit before repeating again.
Mark Chapman, tax communications director at H&R Block Tax Accountants, said that there are a number of tax issues that house flippers should be made aware of.
“In most cases, the profits arising from house flipping would be subject to capital gains tax (CGT),” Mr Chapman said.
“You’ll make a capital gain where capital proceeds on the sale exceed the cost base of the asset. If proceeds are less than the cost base, you’ll make a capital loss, which can generally only be offset against other capital gains of the current year or future years.”
Mr Chapman said an important thing to note is if a client has owned the property for less than 12 months before selling it, they’ll pay CGT at their full rate of tax.
However, if they have owned the property for more than 12 months they can take advantage of the CGT discount to reduce their capital gain by 50 per cent.
Even better, clients that live in the house while the renovations take place can get a CGT exemption.
Mr Chapman said that clients looking to renovate multiple properties at the same time can be treated as if they have a business of renovating properties, meaning they’ll be subject to income tax rather than CGT.
Another important consideration is stamp duty, according to Mr Chapman.
“Every state has different rules around stamp duty, but one thing you can rely on is that every time you purchase a house, you’ll need to budget to spend thousands of dollars settling the stamp duty liability and the more you flip, the more often you’ll pay,” he said.
“However, it should also be noted that you’ll get some financial relief by adding this cost to your CGT cost base.”