Tax Planning for Property Development
Before embarking upon any property development project, you should obtain advice as to the associated tax outcomes. The commencement point is whether the transaction is on revenue or capital account. The tax treatment of a project will usually fall into one of the following categories:
- The disposal of trading stock in the course of carrying on a property development business (revenue account)
- A profit making scheme (revenue account)
- A capital gain on the disposal of a CGT asset (capital account)
If you are not in the business of property development nor undertaking a one-off profit making scheme, the sale or disposal of the property may be a mere realisation of capital. As such, there will be no income tax consequences. But, the disposal will constitute a CGT event and therefore taxable under the CGT provisions.
The mere realisation of capital for land acquired prior to 19 September 1985 would not ordinarily attract CGT. However, if capital improvements (such as the construction of house or multiple dwellings) have been made to the land after 20 September 1985, the improvements may be considered a separate asset to the land and attract CGT on part of the sale proceeds.
Structuring a Property Development
Having identified the potential tax outcomes, it is then necessary to determine which of a variety of structures would be the most appropriate to house the project. Although there are a wide range of possibilities, the following structures are perhaps the most utilised:
- Discretionary Trusts
- Unit Trusts
- Development Management Agreements
- Unincorporated Joint Ventures.
In addition to a consideration of the tax issues, the ultimate selection of the structure may depend on the profile of the parties, whether the property is to be held on capital or revenue account, the length of time to realise a profit and the appetite of the parties for complex arrangements.