From the moment you decide to complete a property development (create more than one lot on a plan of subdivision) stamp duty needs to be a serious consideration in how you structure the arrangement, even before you buy the property.
Getting it Wrong – double duty
Why? Because the costs of getting it wrong are significant.
A property developer client recently got an assessment from the State Revenue Office (SRO) from an audit dating back to 2014 because they nominated incorrectly under the Contract of Sale. End result, they had to pay the SRO $170,000 of additional duty.
The excuse that their adviser at the time didn’t tell them of the issue was irrelevant in the SRO’s assessment of the matter.
Moreover, once a determination is reached by the SRO, it is very difficult (almost impossible) to challenge the assessment because in most cases the duty laws are very clear. Breach them and an adverse finding from the SRO will follow.
The Starting Point – Structure
The key question we ask every property developer is what’s your end intention with the property development?
- To sell all the lots in the development?
- To split them between the development partners?
- To sell some (often to pay the costs of development, then split the balance of the lots between the partners).
This question will determine how you structure your development.
The most common structures we see used in property developments are:
- Joint Venture
- Unit Trust
Most importantly the structure of your development needs to be determined BEFORE you purchase the property.
Not getting your Structure correct before purchasing – double duty
We regularly see situations where a purchaser buys land, then seeks to get their structure advice. This is very risky.
Whilst you can nominate an alternate purchaser under a Contract of Sale without attracting double duty, there is a risk of double duty where:
- Between signing the Contract and Settlement, you undertake development works (obtaining a planning permit) and you FIRST don’t complete a nomination. This is the greatest risk. All the SRO need do is a google search on the property to determine if a permit has been lodged and you can be caught by the double duty risk.
- If you buy the property in percentages and BEFORE settlement change the % ownership. Again there is a duty risk.
Likewise there is great risk where a Unit Trust or Company buys a property and the ownership in these structures is changed before settlement. A Company or Unit Trust is deemed to have an interest in land from the date of signing the Contract so any changes in the shares/units AFTER signing the Contract will trigger duty pursuant to the Landholder Duty provisions where the land value is greater than $1m.
So Which Structure is Best from a duty perspective?
The best structure depends on the initial question we asked – Will units from the development be sold or retained by the property developer?
Often we see that 3-4 units will be sold to repay finance associated with the development with the balance of units split between the development parties.
Basically (from a duty perspective):
- If the intention is to sell all the property development a Unit Trust, Company or Joint Venture Structure is best.
- If the intention is to retain some of the units (and each party to the arrangement takes a unit in lieu of their share) from the property development:
- A Unit Trust can work but the duty exemption to transfer the property to a party to the arrangement will depend on internal loans. A duty exemption is not guaranteed under S36 of the Duties Act.
- A Joint Venture structure is an easier Duty exemption pursuant to S27 of the Duties Act. Less elements to satisfy.
- A Company structure does not work. There is no duty exemption on the transfer of a unit to a shareholder in lieu of their entitlement in the company.
Company Bare Trustee holding on behalf of a Joint Venture
Sometimes with a Joint Venture structure we see a Company holding the property on bare trust for the Joint Venture parties. Where the ultimate intention is that the Joint Venture parties will each take a unit each upon completion of the development, this structure can also cause problems.
It is not possible to transfer property direct from the Company to the Joint Venturer party in lieu of their entitlement. It is a 2 stage process.
In essence there are 2 stamp duty exemptions that apply:
- The “collapsing of the bare trust” arrangement resulting in a transfer from the Company to the Joint Venturer beneficiaries jointly. This requires obtaining a duty concession pursuant to S35 of the Duties Act.
- The partition of the property units amongst the beneficiaries pursuant to S27 of the Duties Act.
There have been several high profile cases where the bare trust duty exemption pursuant to S35 of the Duties Act has not been obtained.
In short you need to be very careful in using this structure.
Property owned by Unit Trusts and Companies
With property prices in Victoria booming where the value of a property often exceeds $1m, most Unit Trusts and Companies will be deemed Landholders for the purposes of the Duties Act. End result, any transfer of shares or units in such a structure may attract duty.
Importantly a Company and/or Unit Trust is deemed to hold an interest in land from the date of signing a Contract. Any transfers in share/unit holding before/after settlement of a property in excess of $1m can attract duty.
Other Duty Triggers and changes
Other important notes when advising on the structuring of a property development are:
- Previously, a party to a property development could provide funding to the development and enter into an “off the plan contract” to take a unit with significantly discounted duty to apply. The “off the plan” duty concessions have been significantly tightened so that it is only available where a purchaser uses the property as their principal place of residence.
- However the above rule has been relaxed under the Covid Duty Regulations. Duty concessions upto 50% apply on purchases of “off the plan” contracts entered into before 30 June 2021. No requirement that they live in the property.
- Previously, a Joint Venture could “distribute” profits to a related development company without attracting duty. However following changes in July 2019, where a party joins in, shares in profits or income arising from a property development, such an arrangement can attract duty on the full value of the properties. There are strict rules around how services provided to an entity that owns land can be paid for.
- Option Contracts to purchase land whilst a developer obtains the necessary approvals to complete a property development also attract duty. There are ways to structure arrangements where the Contract depends on the Purchaser obtaining approvals without attracting duty.
What’s best for you in your circumstances
Each property developer’s situation is different and advice needs to be sought in each instance. There is not one size fits all.
However the key take aways in completing a property development are:
- Be clear in what are your end intentions – sell all the properties or retain some/all of the properties. This will influence your structure.
- Seek legal and accounting advice before you undertake the project.
- Cheap is not always best. Take proper advice. Yes it will cost you but the consequences of getting it wrong will be far greater. Remember our property developer client who copped a $170,000 SRO assessment.
Also remember that understanding your stamp duty obligations is only part of the equation. There is also other taxation (GST, CGT, land tax and personal tax) and estate planning and asset protection strategies to be considered as part of the general structuring of your property development.
For more help with your property development call:
- Dennis Danaher or Peter Saunders (Partners)
- Elizabeth Linedale (Special Counsel)
- William Xian (experienced property lawyer)
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