Structuring Property Deals? – Trips and Traps you need to know

We have seen a lot of the recent focus in the media on Covid-19 and the effect on commercial tenancies.

However what we are seeing at Danaher Moulton is that our clients are still buying and selling properties and structuring property deals. However there have been significant changes that affect how you structure property deals.

In this response we outline 5 traps and 4 opportunities for you and your clients to consider.

Traps

1. 1. Criminal liability when selling. Once upon a time the principal of caveat emptor was alive and well. As a Vendor your main responsibility was to ensure that you complied with your disclosure obligations pursuant to Section 32 of the Sale of Land Act (Vendor Disclosure). However, as of 1 March 2020 if a Vendor knowingly (rather than in the past ” fraudulently”) conceals material facts about a property during the sale process then a Vendor can be liable for a criminal offence and the Purchaser may be able to avoid the deal. Do your Vendor clients know their responsibilities in this regard? The definition of material facts is very wide. We can help manage these risks. For more information see  https://www.consumer.vic.gov.au/saleofland
   2. $170,0000 in Double duty on nominations under Contracts. The State Revenue Office is currently auditing all nominations made under Contracts of Sale going back some years to ensure compliance with Part 4A of the Duties Act. One of our clients (who used another conveyancer) has just copped a $170,000 double duty bill from the State Revenue Office for a purchase completed in 2015. It is very difficult (almost impossible) to challenge the assessment for double duty and so if you get it wrong it cannot be remedied. When nominating under a Contract of Sale, a duty exemption is not automatic. Extreme care should be taken and advice sought immediately upon signing a Contract if there is an intention to nominate or indeed the possibility of a nomination.
   3. Landholder provisions when a Contract has been signed. Pursuant to S74 of the Duties Act, a Company is deemed to own land (for the purposes of the Landholder provisions) upon signing the Contract. What does this mean? This means that if you transfer shares or units in an entity between the Contract Date and Settlement under a Contract of Sale that this may attract duty. We recently had a client’s acquisition of property audited by the State Revenue Office because it had transferred shares in its purchasing entity after the Contract was signed.Key message – get your purchasing entity sorted before buying property. Don’t transfer units or shares in a purchasing entity without taking advice on the landholder provision of the Duties Act.
   4. Property Joint Ventures – beware of the economic entitlement rules under Part 4B of the Duties Act. Once upon a time when structuring a property development between a landowner and developer the landowner could retain ownership of the land, the developer could build on the land and after the sale of the units, the profits could be split – no Duty. Now, this transaction would be caught by Part 4B of the Duties Act and duty would be payable (even though there is no transfer of land between the landowner and developer). In essence any profit sharing between related entities in a property development may attract duty. It’s now more important than ever to take advice to correctly structure your property development for duty purposes.
   5. Duty of 13.5%! Buying a residential property in a family trust? If you have a foreign resident as a potential beneficiary (not just named as principal beneficiary but who could be included in the general class of beneficiaries) then you could pay 13.5% duty on your purchase. When buying a residence in a family trust we recommend that the family trust deed be reviewed and if need be, amended to remove foreign residents as potential beneficiaries. For more information see https://www.sro.vic.gov.au/foreignpurchaser

Opportunities

1. 1. Significant Duty Savings – Pre 30 June 2017 Contracts – the old” Off The Plan” Duty Concessions. Contracts signed before 30 June 2017 are now coming due for settlement. In some instances the purchasers cannot complete. For pre 30 June 2017 Contracts, the old “Off The Plan“ Duty Concession rules apply. What does this mean? It means that if you are nominated as a purchaser under a Pre 30 June 2017 Contract that you can get substantial duty concessions regardless of whether the property will be used as your principal place of residence or rental property.Long and short: if you act for a developer (and have distressed purchasers) or you have a distressed purchaser as a client in a pre 30 June 2017 off the plan Contract, the property has a competitive advantage (in comparison to other properties) in offering significant duty concessions to buyers. It is critical that the correct process is followed to maintain these concessions.
   2. Parents and children transactions can be exempt from duty. Generally there is no duty concession (known as the love and affection transfers) between parents and children or companies and shareholders. However, where one party has provided all the funds to enable the other to buy, that party can call for the property back without the payment of duty under the little known “apparent purchaser” provisions of the Duties Act.
   3. Regional Victoria commercial properties with Duty concessions up to 50% (by 2023). Post Covid thinking about buying commercial property? Then you should factor in the substantial duty concessions on offer that relate to commercial properties in Regional Victoria. As of 1 July 2020, the Duty concession will be 20% which increases to 50% by 2023.
   4. Structuring? – JV’s versus Unit Trusts versus Companies. All else being equal, the partition provisions of the Duties Act (s27) is a simpler and less complicated duty concession option than the unit trust concession contained in S36B of the Duties Act. What does this mean?When structuring a small property development where a key outcome is that the participants take a unit from the development exempt from duty, a joint venture structure will provide a greater likelihood of obtaining a duty concession than a unit trust structure. A company structure will not provide a duty concession.

Summary

Buying and selling property is full of traps. Some of which can cause significant financial distress. We want to help you and your clients avoid the risks and maximise your position.