Real tax cases of property and construction

Discussion in 'Accounting & Tax' started by Ross Forrester, 24th Aug, 2018.

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  1. Ross Forrester

    Ross Forrester Well-Known Member

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    The Tax Office are currently released a draft paper providing outlines of real cases and decisions being made by them in relation to property developers.

    It is a bible of simple English for people wanting to understand how different examples apply with the development of property.

    The example 9 is a great example of how you can get caught out.


    1. Example 9 - Time of commencing development
      1. An owner held 100 hectares of unimproved rural land acquired in 1983.
      2. In 2010, the local Council, of its own accord, rezoned the land from ‘Farming’ to ‘Residential’.
      3. Previously, in 2007, the owner had entered into a contract with an unrelated developer to sell the unimproved land for $10 million, which did not proceed to completion.
      4. The developer attempted to gain Council approval to subdivide the land into 880 residential lots in 2008, but was unsuccessful.
      5. A new developer was engaged in 2009 to lodge another application with the Council, but the contract with the developer fell through.
      6. Later, another new developer was engaged, and after several attempts was successful at gaining approval for a smaller number of lots, with some land to be sold to the local Council in 2011.
      7. After receiving approval from the Council, the owners sold the 2 lots to the Council for a total of $12 million.
      8. The developer also developed the remaining land for sale.
      9. The development agreement included fee clauses that required the owner to pay a development fee to the developer of 5% of the sale proceeds for each lot, in addition to agreed development costs.
      10. Work done on the remaining lots included roads and drainage and some head works.

      Our position
      1. Weighing all of the facts together, it is arguable that the owners entered into carrying on a business in 2007 when they attempted to redevelop the land. Whilst there were some short periods of nil activity, they continued in this pursuit until successful in later years. In the alternative, it is arguable that they entered into a profit-making undertaking or scheme at that time to develop the properties for sale. The degree of financial risk borne by the landowner (i.e. the landowner is the party principally at risk if 95% of the sale price of the completed lots does not exceed the sum of the development costs and value of the land when the development commenced), together with the intensity of the subdivision, is also persuasive.
    The paper can be found here. The final date for feedback was 17 August (which I have already done) but it is a good read for the layperson and I recommend it.

    Thanks

    Ross.
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I had a long interview about these issues some time back. I think its a good practical way for the ATO to address more meaning to the word "develop" which can range from a CGT issue to a business with a hell of a gap in between....I still suspect it will mean additional complexity by taxpayers needing to seek professional advice as its not always clear but some more tangible tests are needed.

    A example of an area where I feel more tangible tests are needed is a JV (which has no legal description as such) . When one party provides land they may actually part of the development and this could affect CGT profits v's ordinary income and even GST for a taxable supply where there is a created partnership. While a partner cannot supply land to a partnership that may be integral to tainting their CGT rights. You cant say you are passive if you are also involved. After all nobody "lends" their land without expectations of benefits. The issue is how involved must you be ?

    The other one I was hoping to see includes example 9. I dont dispute that view but in the past it seemed every taxpayer would dispute the advice and wanted to argue often shopping for a bad tax adviser who didnt know what they were talking about.

    I'm glad you said simple English Ross as I made that very comment that rulings and guidance on this issue need to be capable of better understanding by inexpert people. I also liked its wording. I believe it assists better understanding.

    I have been waiting to incorporate these views when published as final into a revised developer toolkit
     
    Last edited: 24th Aug, 2018
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A confusing example
    First mention of 2 lots is at point 7 - 2 out of how many? There must be more because the developer seems to have entered into a development agreement at point 9 - presumably with the original owners?

    This statement is also vague:
    Previously, in 2007, the owner had entered into a contract with an unrelated developer to sell the unimproved land for $10 million, which did not proceed to completion.

    Seems this was a joint undertaking to sell to a 3rd party.

    They could try to make things more clearer!
     

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