Property developments, structuring them and taxation consequences involve considering a number of issues including:
- Asset protection – can the real property be protected if the development goes bad (assuming it is not being used as security for the development)?
- The background – is it property that has been held long term with a recent decision to develop or was it acquired to develop from the outset or something in between?
- Taxation – are we trying to maintain the tax profile of the property (where it is pre-CGT or a main residence) and will the developed product be sold, held or not sure?
- In which State or Territory is the property located?
The structure will always be influenced by these matters, but common variations dot the structuring landscape.
Where, for example, the property has been a long-term hold on capital (CGT) account, most advisers would consider a joint venture or licence to build structure where:
- The property owner continues to own the property and does not participate in the development at all (save perhaps signing the development application and title documents though in sophisticated circumstances a limited power of attorney is granted to the developer to do this)
- The development is undertaken either by a related entity (usually a company) where the controlling individuals have experience) or an arm’s length developer
- The property is used as security to undertake the development with actual draw downs on the facility timed with the developer securing contracts for sale for the yet to be developed lots
- The property owner receiving gross cash returns and paying a fee to the developer as an expense (or alternatively sharing proceeds based on gross as opposed to net receipts, to avoid a common law partnership from arising) or developed product. Either way, this is generally calculated to reflect the market value of what they owned originally, which weights the tax characterisation heavily towards capital (assuming that a sale of the land without development, would have been a mere realisation). Where the owner continues to own the land, this typically requires that they pay the developer a fee equal to the excess of the gross sales over the original market value or entitlement of the property. However, care needs to be taken when the owner’s return is materially contingent on the ultimate success of the venture, as the ATO have more recently indicated that this can indicate that the transaction may be on revenue account, even where the owner is otherwise passive
- For product that will be retained, careful identification of that from the outset can prevent it from ever being considered as trading stock. Anything that exceeds this is dealt with separately and generally taxed as income. There are also a number of tax issues and elections to be considered upfront where land originally held as a capital asset first becomes held for development and sale as trading stock
- A variation to this theme is where the property owners sell to the developer for an agreed amount which is paid either by way of cash or developed product with a right to receive a further amount of profit; this is usually avoided as a consequence of the upfront stamp duty cost and potential tax liability of the property owner, where the property does not have a CGT sheltered status.
Done properly, this usually allows the property owner to maintain the tax profile of the property and avoid the liabilities associated with the development (save for the property being used as security).
Structuring for property developers looks quite different however. Most would have a tax consolidated group where a parent company owns a landowning company, development company and marketing company with special purpose companies set up on an as needed basis. Such a structure allows:
- The group to be taxed as a single entity to allow profits to be netted off against losses simply
- The grouping does not extend to commercial liabilities, so liabilities of the development company should not infect the landowning company (assuming there is not a partnership between the two)
- As none of the properties of a developer will be on capital account, the use of companies is preferred and a tax consolidated group allows these assets to be moved around without tax or GST (which requires a separate election to be made) and, for most States, without duty.
There are then all the circumstances in between that will be a variation on these themes and normally try to take into account land tax for long term holdings and stamp duty partitioning for developments, where different parties come together and wish to retain particular lots.
