Calculating profit on a development project involves a comprehensive analysis of both costs and revenues. The goal is to accurately assess the financial outcome after accounting for all expenses and taxes. This process requires a detailed understanding of Australian development costs, tax implications, and market conditions.
Under the ATO's framework, your starting point is the project's total revenue, typically from the sale of developed units or properties. From this, you subtract the total costs, which include land acquisition, construction, financing, professional fees, and holding costs. It's essential to account for the Goods and Services Tax (GST), which may apply to sales, and Capital Gains Tax (CGT) implications.
A common misconception is that profit can be simply calculated by subtracting construction costs from sale proceeds. However, this ignores critical factors such as interest on loans, developer fees, and potential cost overruns. It's also crucial to incorporate risk factors and market volatility into your calculations.
To see how this plays out, consider a practical example. Take a 10-unit apartment development in Sydney, purchased for $2 million, with construction costs of $3.5 million. Suppose the project sells for $8 million. The total costs, including land, construction, and additional fees, amount to $6 million. After subtracting these costs, the gross profit is $2 million. However, after accounting for GST and other taxes, the net profit may be significantly less.
In our experience reviewing thousands of properties across Australia, we see developers often underestimate holding costs, particularly in projects that extend beyond the expected timeframe. Another frequent oversight is not factoring in the full impact of GST on sales and purchases, leading to unexpected tax liabilities. Developers sometimes neglect to include a buffer for unforeseen expenses, which can erode profit margins if not planned for.
The answer can differ depending on your situation. For instance, if a project is held in a company structure, CGT discounts do not apply. Projects commenced before certain legislative changes may have different tax treatments. Additionally, the GST margin scheme might be applicable, altering the tax payable on sales. Also, consider the impact of joint ventures versus individual ownership structures.
Given the complexity of accurately calculating profit, engaging both a Chartered Quantity Surveyor and an accountant is advisable. A QS can provide detailed cost assessments and depreciation schedules, while an accountant ensures compliance with tax obligations and maximises tax efficiency.