Effective Property Development Tax Structures
As a tax adviser, there is nothing more frustrating than landing a great new client in a terrible property development tax structure. Small to medium developers often use a fresh entity/structure for each development to isolate risk, so they aren’t as susceptible as clients in other industries to structural problems. However, this doesn’t mean that the wrong tax structure can’t result in you donating far more tax than you otherwise would have on a particular development.
My advice to anyone in business is, “get advice, and get it early”. This is even more important for property developers as accurate estimates of income tax, GST, land tax and duty should be factored into any meaningful feasibility study.
Common Property Development Tax Strategies and Pitfalls
The various property development tax and duty issues are relatively straightforward (although I constantly see clients getting GST on property development wrong). However, any time you want to do something a little out of the ordinary, the property development tax issues get significantly more complex. For example, what if you would like to sell-off the bulk of your development but retain some stock for rental income and long-term capital growth?
Ordinarily, companies are used as development vehicles and trusts are used to hold capital assets (asset held for long-term growth). The reason for this is that, unlike companies, trusts may be eligible for the 50% CGT discount on eventual disposal. Therefore, having a ‘mixed purpose’ with regard to your end product within a single entity vehicle can give rise to problems, not least of which is ever convincing the ATO that as a property developer, the relevant entity holds some assets on capital account.
How to leverage an ‘In-House Joint Venture’ for your Property Development Tax Structure
If a developer wants advice on setting up a property development tax structure and comes to us with a clean slate and a decision from the outset that a set-number of townhouses/apartments will be retained for rental income and long-term capital growth, then we can put together an ‘in-house joint venture. ’ An in-house joint venture means that a company and trust that you control enter into a joint venture to develop the property, share costs proportionately and split the assets (not the cash) on completion.
Done correctly, this will facilitate:
- CGT and duty exemption on partition for the trust;
- Discount CGT treatment on eventual disposal of the property/ies held in the trust.
This means that the trust acquires the property/ies at cost, which boosts its rental yield compared to having to acquire it at market value. In addition, on eventual disposal of the property/ies by the trust (subject to meeting certain conditions), the gain will be subject to tax at 22.5% instead of 45% (excluding Medicare Levy and Budget Repair Levy).
The key is getting property development tax right from the start, being clear as to your goals and ensuring that your actions objectively support those goals. With the right forward planning, you could develop at cost, earn rent in the meantime and pay half the tax on eventual disposal.
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