Most property developers build their first feasibility model assuming Capital Gains Tax (CGT) applies to their profit, and many quietly pencil in the 50% Capital Gains Tax (CGT) discount as if it were theirs to claim. For the majority of development projects, that assumption is wrong, and it can overstate the after-tax return by a wide margin. When you buy land to develop and sell, the Australian Taxation Office (ATO) generally treats that land as trading stock, and your profit is taxed as ordinary income, not as a capital gain. The 50% Capital Gains Tax (CGT) discount, the main residence exemption and the small business Capital Gains Tax (CGT) concessions typically fall away.
This guide is written for the developer trying to work out how a sale will actually be taxed, what that does to the margin, and where the planning levers genuinely sit. It walks through the three possible tax outcomes for a property sale, how and when land becomes trading stock, the Capital Gains Tax (CGT) event K4 election that matters most to landholders who develop their own land, and the 2026-27 Federal Budget changes that replace the 50% discount from 1 July 2027 and reshape what capital treatment is even worth. The discount still applies to gains up to that date, so this guide covers the current mechanics and how the reform recasts them. The reform is now law, in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (assent 26 June 2026), with effect from 1 July 2027.
Why the answer decides your after-tax margin
The income-versus-capital question is not academic. It often moves the after-tax outcome more than any single line in your construction budget.
Take an individual or a discretionary trust selling a completed project at a $1,000,000 gross profit. If the proceeds are taxed on capital account and the asset has been held for more than 12 months, the 50% Capital Gains Tax (CGT) discount can roughly halve the taxable gain, so tax may be levied on around $500,000. If the same $1,000,000 is taxed as ordinary income because the land was trading stock, the full $1,000,000 is assessable, with no discount. At the top marginal rate the difference between taxing $500,000 and taxing $1,000,000 can be in the order of $235,000, before the Medicare levy. That is a real number, and it is the kind of number that decides whether a deal stacks up. That comparison uses the 50% discount as it stands for gains up to 1 July 2027; from that date the discount is replaced by cost-base indexation and a 30% minimum tax on the real gain, so the capital-account advantage narrows, even as the income-versus-capital gap stays the number that decides many deals.
The catch is that developers rarely get to choose capital treatment. The whole point of a development is to add value and sell at a profit, which is exactly the activity the tax law characterises as revenue in nature. Understanding why, and where the genuine exceptions sit, is what separates a feasibility model that holds up from one that flatters the return.
The three tax outcomes for a property sale
Australian tax law treats the proceeds of selling developed or subdivided land in one of three ways. The Australian Taxation Office (ATO) guidance on the tax consequences of property sales sets out the same three-way split, and the distinction comes from a long line of case law rather than a single section of the legislation.
Mere realisation of a capital asset
If you simply sell an asset you have held, and you do no more than is needed to realise it to best advantage, the gain is a capital gain. This is the capital account outcome, where the Capital Gains Tax (CGT) rules in the Income Tax Assessment Act 1997 (ITAA 1997) apply and concessions such as the 50% discount may be available.
The classic developer-adjacent example is the farmer who subdivides at the end of a working life. In Casimaty v FCT (1997) FCA 1388, a grazier subdivided and sold parts of his farm over many years, doing only the roadworks, water and sewerage that council required. The Federal Court held that the proceeds were the mere realisation of a capital asset, not income, because there was no profit-making intention at acquisition and nothing beyond the minimum needed to sell well. Mere realisation, done in an enterprising way to get the best price, can still be capital.
An isolated profit-making undertaking or scheme
If the transaction is more than mere realisation but does not amount to carrying on a business, the net profit is generally ordinary income from a profit-making undertaking or scheme. This is the middle ground, and it catches a great many one-off developments.
The principle comes from FCT v The Myer Emporium Ltd (1987) HCA 18, where the High Court held that a profit from an isolated transaction is income where two elements are present: the taxpayer entered the transaction with the purpose of making a profit, and the transaction was entered into in the course of carrying on a business or in carrying out a business operation or commercial transaction. The Australian Taxation Office (ATO) collected the relevant factors in Taxation Ruling TR 92/3, which remains the working reference for the income-versus-capital line.
In Westfield Ltd v FCT (1991) 28 FCR 333, the Full Federal Court refined the test, holding that for an isolated transaction the profit-making purpose generally needs to exist at the time the asset is acquired, not merely formed later. That timing point is why your intention when you sign the contract to buy the land matters so much.
Carrying on a business of property development
If your activity has the scale, repetition, organisation and commercial character of a business, the land you buy to develop and sell is trading stock, and your profit is ordinary income on revenue account. This is the outcome most active developers fall into, and it is taxed exclusively under the trading stock provisions rather than the Capital Gains Tax (CGT) rules. Any capital gain or loss on an asset held as trading stock is disregarded under section 118-25 of the Act, which is the rule that stops the two regimes taxing the same gain twice.
In FCT v Whitfords Beach Pty Ltd (1982) HCA 8, land originally held so a group of fishermen could access their shacks was, after a change of ownership and purpose, rezoned, subdivided and developed on a substantial scale. The High Court held the proceeds were income because the company had moved from holding the land to carrying on a business of developing and selling it. Whitfords Beach is the leading authority on how a change of purpose can convert a capital asset into a revenue-account venture.
The factors the Australian Taxation Office (ATO) weighs
No single factor is decisive. The Australian Taxation Office (ATO) weighs the whole picture, drawing on Taxation Ruling TR 92/3. The indicators that push a sale towards ordinary income typically include:
- a change in the purpose for which the land is held
- acquiring additional land to add to the original parcel
- a coherent plan for the subdivision or development
- a business-like organisation, with a project manager, advisers and finance
- borrowing to fund the acquisition or the works
- a level of development beyond what council requires for approval
- buildings erected on the land to maximise value
- engaging professionals such as architects, town planners and marketers
- the scale, complexity and number of steps involved
By contrast, a sale tends to look like a capital gain where the land was held privately or as a long-term rental or farm, the work done was minimal, the financial risk was low, and the owner has no history of development. For a working developer, most of the first list is simply a description of doing the job properly, which is precisely why development profit is so often on revenue account.
When land becomes trading stock
For developers, the trading stock question is usually the one that matters, because trading stock treatment is the most common outcome and the one with the fewest concessions.
Taxation Determination TD 92/124 sets the test. Land is treated as trading stock where it is held for the purpose of resale and a business activity that involves dealing in land has commenced. Both elements have to be present. The Australian Taxation Office (ATO) says the business activity is taken to have commenced when a taxpayer “embarks on a definite and continuous cycle of operations designed to lead to the sale of the land”.
Two points from that determination tend to surprise developers. First, the acquisition does not have to be repetitive. A single purchase of land for development, subdivision and sale by a business commenced for that purpose is enough for the land to be trading stock. You do not need a track record of prior projects. Second, the definition of trading stock in section 70-10 of the Act is broad. Anything produced, manufactured or acquired that is held for sale or exchange in the ordinary course of business can be trading stock, and the courts have confirmed that land can qualify.
Land that is not yet in a saleable condition can still be trading stock. It is generally treated as a single item of trading stock until it is subdivided into lots that are ready for sale, at which point each lot tends to become a separate item. The related determinations TD 92/125, TD 92/126 and TD 92/127 deal with the timing and the treatment where a development is sold part-completed or abandoned.
The practical takeaway is straightforward. If you buy a site intending to develop and sell it, and you commence the development, the land is almost certainly trading stock from the outset, and the Capital Gains Tax (CGT) rules will not apply to it at all.
What trading stock treatment actually costs you, and where it helps
Trading stock treatment is not all downside, but the headline cost is real. According to the Australian Taxation Office (ATO) summary of how the difference affects your tax, where property is held as trading stock the Capital Gains Tax (CGT) provisions do not apply, and the Capital Gains Tax (CGT) discount, the small business Capital Gains Tax (CGT) concessions and the main residence exemption do not apply to any profit from those properties.
What you lose on revenue account:
- the 50% Capital Gains Tax (CGT) discount, which can otherwise halve a gain for individuals and trusts
- the main residence exemption, even if you lived in a dwelling on the land for a period
- the small business Capital Gains Tax (CGT) concessions in Division 152 of the Act
What you gain, or at least what works differently:
- Profit is calculated like any other business profit. Land and construction costs sit in trading stock, and you bring the profit to account as lots settle.
- A net loss on revenue account can be offset against your other income in the same year, which a capital loss cannot. Capital losses only offset capital gains.
- Holding costs such as interest, council rates and land tax incurred while the land is trading stock are generally deductible in the year incurred as ordinary business expenses, rather than being locked into a cost base.
- You are generally entitled to an Australian Business Number and, where you are registered, to Goods and Services Tax (GST) input tax credits on development costs.
There is a timing dimension too. On capital account, tax is generally deferred until the Capital Gains Tax (CGT) event happens, usually at sale. On revenue account, profit is recognised as trading stock is sold, and the movement in your opening and closing stock feeds into each year’s result. For a multi-stage project that settles lots across several income years, this can spread the tax across those years.
Entity choice changes the maths
Because the discount is the single biggest variable, the entity that owns the project matters.
| Entity | Tax on revenue-account profit | 50% Capital Gains Tax (CGT) discount on capital account |
|---|---|---|
| Individual | Marginal rates up to 45%, plus 2% Medicare levy | Available if asset held over 12 months |
| Discretionary trust | Taxed in the hands of beneficiaries at their rates | Discount can flow through to eligible beneficiaries |
| Company | Flat 25% or 30% (see below) | Not available to companies |
| Complying super fund | 15% | Reduced discount of one-third |
For companies, the Australian Taxation Office (ATO) company tax rates set a rate of 25% for a base rate entity, broadly a company with aggregated turnover under $50 million and no more than 80% passive income, and 30% otherwise. A company never accesses the Capital Gains Tax (CGT) discount, so for a company the income-versus-capital distinction changes the timing and loss treatment more than the rate. For individuals and trusts, the distinction can change the effective rate dramatically, because the discount is only ever available on capital account.
Two announced changes recast this table from 1 July 2027. The 50% discount column is replaced for individuals and trusts by cost-base indexation and a 30% minimum tax on the real gain, with a separate election for investors in new builds, and from 1 July 2028 a 30% minimum tax applies to the income of discretionary trusts, which narrows the streaming advantage a trust otherwise offers. The current rules are what you model today, but structure with the reform in view: the discount reform is now law and takes effect from 1 July 2027, while the discretionary-trust measure is still at consultation, so confirm the current detail against Australian Taxation Office (ATO) guidance.
This is one reason the right structure is rarely obvious. A company offers a low, certain rate and asset protection but no discount, while a trust can deliver the discount on genuine capital-account gains but exposes you to other rules. The interaction with stamp duty, land tax and the new trust measures discussed below means structuring decisions are best made with advice before you exchange, not after. Legal and tax advisers typically share this structuring work, and it is worth involving both early rather than once contracts are signed.
The capital side: when Capital Gains Tax genuinely applies
Capital account treatment is not a myth. It applies where you genuinely hold property as an investment or where a sale is truly a mere realisation rather than a venture. For developers, the clearest case is build-to-hold.
If you develop with a genuine intention to hold the completed asset and derive rental income from it, and you can evidence that intention, the asset is generally on capital account. When you eventually sell, the gain is a capital gain, and if an individual or trust has held the asset for more than 12 months, the 50% Capital Gains Tax (CGT) discount under Division 115 of the Act can apply. The Australian Taxation Office (ATO) Capital Gains Tax (CGT) discount guidance confirms the 12-month rule, the 50% rate for individuals and trusts, the one-third rate for complying super funds, and that companies are excluded.
The decision between developing to sell and developing to hold is one of the most consequential a developer makes, and tax sits at the centre of it. We cover the broader trade-offs in build to sell versus build to hold.
A word of caution. Intention is judged on the evidence, not on what you say after the fact. The Australian Taxation Office (ATO) looks at finance applications, board minutes, marketing activity and conduct. A “build-to-hold” project that is quietly marketed for sale throughout construction may be characterised as revenue in nature regardless of the label. Written records made at the time are generally the strongest evidence of purpose.
Capital Gains Tax event K4: the landholder-developer’s key decision
The most valuable planning point in this whole area applies to a specific but common situation: you already own land on capital account, perhaps a long-held family block, an investment property or farmland, and you then decide to develop it. At the point the land starts being held as trading stock, Capital Gains Tax (CGT) event K4 under section 104-220 of the Act can apply.
Here is the mechanism. When a Capital Gains Tax (CGT) asset you already own starts being held as trading stock, you can make an election under paragraph 70-30(1)(a) of the Act to be treated as having sold the asset, just before the change, for either its cost or its market value. If you elect market value, Capital Gains Tax (CGT) event K4 triggers a capital gain or loss at that point, and the land then enters the trading stock rules at that same market value.
Why this matters: the election effectively splits your total gain into two parts. The growth in value up to the day you started developing is taxed on capital account, where the 50% Capital Gains Tax (CGT) discount can apply if you have held the land for more than 12 months. The growth from that day until the lots sell is taxed on revenue account under the trading stock rules. Without the election, the land usually enters trading stock at its original cost, and the entire gain, including all those years of capital growth before you ever picked up a shovel, gets taxed as ordinary income with no discount.
A simplified illustration shows the size of the effect. Assume an individual bought land for $500,000 in 2010, started subdividing in 2020 when the land was worth $1,100,000, and sold the finished lots for $2,000,000 in 2024, ignoring development costs for simplicity. With no election, the full $1,500,000 gain is ordinary income. With a market-value election, the first $600,000 is a capital gain eligible for the 50% discount, so only $300,000 of it is taxable, and the remaining $900,000 is taxed as trading stock profit. On these figures the election can save in the order of $160,000 in tax. The market value for this purpose is determined on a highest and best use basis, with guidance in Taxation Determination TD 97/1, and the unsubdivided land is valued as a single parcel rather than as the sum of future lots. That saving turns on the 50% discount applying to the capital portion, which holds for gains up to 1 July 2027; once the discount is replaced by cost-base indexation and a 30% minimum tax, the value of splitting the gain changes, so the election is still worth pricing but should be modelled on the rules that will apply in your year of change, with advice.
The election is not free of downside. Triggering Capital Gains Tax (CGT) event K4 brings the capital gain to account in the year you start developing, before you have sold anything or received any cash. For a developer funding the works, that can create a genuine cash-flow problem. Some landowners instead choose to sell the raw land to a developer outright, accepting capital treatment on the lot and avoiding the trading stock regime altogether, at the cost of giving up the development upside. The election is generally made by the time you lodge your return for the year the land becomes trading stock, so it is a decision to take early and with advice, not something to leave to the accountant after settlement.
Changing your mind mid-project
Purpose is not fixed. The Australian Taxation Office (ATO) accepts that your purpose can change during the ownership period, and the tax follows the change.
The cleanest illustration comes from the Australian Taxation Office (ATO) example of a suburban block. A long-term owner demolishes the family home and builds three townhouses: one to live in, one to rent, and one to sell at a profit. The Australian Taxation Office (ATO) treats the townhouse built with the intention to sell as a profit-making undertaking taxed as ordinary income, while the two built to keep are the realisation of capital assets. One project, two tax outcomes, apportioned across the dwellings.
The same splitting applies in time as well as across lots. Where land starts as a capital asset and later becomes part of a development, the overall gain can be divided between a capital gain on the period of capital holding and ordinary income on the development phase, which is exactly what the Capital Gains Tax (CGT) event K4 election is designed to formalise. Where the facts are mixed, expect the Australian Taxation Office (ATO) to look closely and to want contemporaneous evidence of when and why your intention changed. The subdivision mechanics that often trigger these questions are covered in our land subdivision guide.
Common developer scenarios and their likely treatment
Every project turns on its own facts, and the Australian Taxation Office (ATO) weighs all of them together rather than applying a checklist. The patterns below are not rulings, and a different set of facts can produce a different answer. They are offered as a guide to where a typical fact pattern tends to land, so you know which questions to put to your adviser.
Buy a site, develop, sell the lots
This is the core development case, and it almost always sits on revenue account. The land is generally trading stock from acquisition, the profit is ordinary income, and the 50% Capital Gains Tax (CGT) discount does not apply. Build your feasibility on that basis. The fact that it is your first project does not change the answer, because a single acquisition for development and sale is enough under Taxation Determination TD 92/124.
Knock down a long-held home and build townhouses to sell
This is the change-of-purpose case. The profit attributable to the development and sale is typically ordinary income from a profit-making undertaking, even if you are not in business. Where you keep one dwelling to live in or to rent, that portion may remain on capital account, so the outcome is often apportioned across the dwellings. If the land carried significant pre-development capital growth, the Capital Gains Tax (CGT) event K4 election can be valuable, and it is worth pricing before works start.
Subdivide the back paddock with minimal works
Where a genuinely long-held property is subdivided with only the works council requires, no buildings erected, low cost relative to land value and no commercial marketing operation, the proceeds may be a mere realisation taxed on capital account, following the reasoning in Casimaty. The more you do beyond the council minimum, and the more the activity looks planned and commercial, the more likely the result tips to ordinary income. This is a genuinely grey area, and small differences in conduct can change the answer.
Build to hold and rent, then sell years later
If you develop with a genuine, evidenced intention to hold and derive rental income, the completed asset is generally on capital account, and a later sale can attract the 50% Capital Gains Tax (CGT) discount for an individual or trust that has held it for more than 12 months. The risk is that the Australian Taxation Office (ATO) characterises the project as revenue in nature if the evidence points to an intention to sell. Contemporaneous records, finance terms and how you actually use the asset all matter, and the 2027 reforms below change what capital treatment is worth.
Land bank now, develop or sell later
Holding land for future development is itself an indicator of a commercial purpose. If you acquired with development or resale in mind, the eventual profit is likely ordinary income, and the holding costs are generally deductible if the land is already trading stock or held in a business. If you genuinely acquired for investment and only later decided to develop, you are back in change-of-purpose territory, where the Capital Gains Tax (CGT) event K4 election and the timing of your change of intention become the key planning points.
Joint venture with a landowner
Where a landowner contributes a site and a developer runs the project, the tax outcome depends heavily on the structure, whether it is a true partnership, a development agreement, or a profit share, and on each party’s intention. The landowner may be on capital account for the land while the developer is on revenue account for the development profit, or both may be on revenue account. These are structured before the deal is signed, not after, because the structure largely drives the result.
How the 2026-27 Budget changes the capital-account calculus
The capital side of this picture is changing. The 2026-27 Federal Budget, handed down on 12 May 2026, announced a significant reform to the Capital Gains Tax (CGT) discount, which has since been legislated in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (assent 26 June 2026). From 1 July 2027, the 50% Capital Gains Tax (CGT) discount is replaced with a discount based on inflation, plus a minimum 30% tax on gains. The stated aim is that investors pay tax only on their real, above-inflation gain. The reform applies only to gains arising after 1 July 2027, with the existing discount continuing to apply to gains accrued up to that date.
For developers, the detail to watch is the carve-out: the Budget states that investors in new builds will be able to choose either the 50% Capital Gains Tax (CGT) discount or the new inflation-based arrangements. As announced, that choice is framed around investors acquiring qualifying new builds, and whether a build-to-hold developer of new stock can access it is not settled, especially where the stock is trading stock and sits outside the Capital Gains Tax (CGT) system entirely, so treat it as an open question pending detailed guidance rather than a benefit you can bank. Two related measures sit alongside it. Negative gearing is limited to new builds from 1 July 2027 under the same Act, with existing arrangements grandfathered for properties held before Budget night, while a proposed minimum tax of 30% on the income of discretionary trusts, from 1 July 2028, is still at consultation, with some exceptions and three years of rollover relief for restructures. The Budget also reintroduces loss carry back from 2026-27, letting eligible companies offset a current-year revenue loss against tax paid in the prior two years, capped by their franking account.
The capital gains and negative gearing measures are now law under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, taking effect from 1 July 2027; the discretionary-trust minimum tax is still at consultation. Confirm the current detail against current Australian Taxation Office (ATO) guidance before you rely on it. The direction of travel is clear enough to factor into planning now: the premium on genuine capital-account treatment for established stock is being reduced, while new-build investment retains a choice. We track the development-specific detail in our 2026-27 Federal Budget guide for property developers.
Goods and Services Tax, stamp duty and land tax sit alongside this
Income tax and Capital Gains Tax (CGT) are Commonwealth taxes. They do not vary between New South Wales, Victoria, Queensland, South Australia, Western Australia, Tasmania, the Australian Capital Territory and the Northern Territory. The trading-stock-versus-capital question is decided under the same federal law wherever your site sits, which is why this guide does not run a state-by-state table for it. That federal uniformity is itself worth knowing, because the other taxes on your project are anything but uniform.
Goods and Services Tax (GST) usually applies to the sale of new residential premises and to most commercial property sales. The income tax characterisation and the Goods and Services Tax (GST) treatment are separate questions, although they often move together, because a profit-making development is typically also an enterprise for Goods and Services Tax (GST) purposes. The margin scheme can reduce the Goods and Services Tax (GST) payable on a sale, and it interacts with how you account for land cost. We cover it in detail in our Goods and Services Tax (GST) margin scheme guide.
Stamp or transfer duty and land tax, by contrast, are state and territory taxes, and they differ sharply by jurisdiction, including foreign purchaser surcharges and absentee owner surcharges in several states. These can be material holding and acquisition costs, and on revenue account the holding costs are generally deductible as incurred. The duty payable on acquisition varies enough that it is worth modelling for the specific state, using the relevant stamp duty calculator for your jurisdiction.
Putting it in your feasibility
The income-versus-capital question is not a year-end accounting detail. It is a feasibility input that belongs in your model from the first cut, because it can swing the after-tax return by a quarter of the gain or more for an individual or trust.
A few practical habits tend to help. Model the after-tax position on the realistic assumption that your development profit is ordinary income, so the headline return is not built on a discount you will probably never claim. Where you already own the land, get advice on the Capital Gains Tax (CGT) event K4 election before you start works, because the election is time-limited and the value of splitting the gain can be large. Decide your entity structure before you exchange, weighing the company rate against the discount that only individuals and trusts can access on capital account. And keep contemporaneous records of your intention, because purpose is judged on evidence.
This is where a feasibility tool earns its place. With Feasly’s feasibility modelling and sensitivity analysis, you can run the project on a revenue-account assumption and stress-test how the effective tax rate moves the residual land value and the margin, rather than discovering the difference after the lots have settled. Modelling the after-tax return under the treatment that is most likely to apply tends to produce a far more honest view of whether a deal is worth doing.
None of this is a substitute for tailored advice. The income-versus-capital line turns on the specific facts of your project, and the Australian Taxation Office (ATO) will weigh all of them together. For a project of any size it is generally worth confirming the position with a tax adviser, and where the stakes justify it, applying to the Australian Taxation Office (ATO) for a private ruling so you have certainty before you commit. Get the characterisation right early, and the rest of your feasibility can be built on numbers that will survive contact with your tax return.