Syndicate Capital Gains Event???

Discussion in 'Accounting & Tax' started by Tom Simpson, 7th May, 2020.

Join Australia's most dynamic and respected property investment community
  1. Tom Simpson

    Tom Simpson Well-Known Member

    Joined:
    13th Dec, 2016
    Posts:
    186
    Location:
    Subiaco
    Hi Team

    I have an interesting situation that I hope someone else has come across to provide some insight.

    Problem
    I'm involved in a JV in which we have a Property Pty Ltd with 1 director and shareholder who has provided the servicing for the project and owns the properties. There is a second Capital Pty Ltd that has lent the cash for the project to the Property Pty Ltd. The profit from the project is owed to the Capital Pty Ltd as interest on the loan, to be repaid when the properties are sold and the project is finished (ie the final profit/loss outcome will be shown on the Capital Pty Ltd balance sheet).

    We own the property with finance and are ready to construct. Current LVR is about 43% as subdivision has occurred and titles are issued. Unfortunately the Director/Shareholder of Property Pty Ltd has lost their job and can no longer show servicing ability.

    Action
    We want to swap them out as a Director and Shareholder to bring someone else in who will have loan servicing ability. This on the surface looks to trigger a CGT event for the existing shareholder, as the subdivision has been finalised and equity has been added. If this is the case, we could look to remove the existing person as a Director, keep them as a shareholder and add the new person as Director and shareholder.

    Perspective
    We're not entirely certain that a CGT event will be triggered, as the commercial arrangement is that the servicing Pty Ltd owes the full profit to the investors, therefore there is an offsetting liability hence there is no profit for the company. It's an SPV so the "profit" for the company would be the capital gains, but there is an equal offsetting liability for the SPV to pay the profit to the investors therefore the tax implications go back to the investors. The challenge with showing this on the balance sheet is that the exact profit won't be known until all properties are sold. Does anyone have a perspective on how this could be managed from an accounting view?

    The other option is to keep the existing person as a shareholder and add the new person as a Director and shareholder. We would then need a lender that is happy for the existing shareholder to stay there (potentially securing a guarantee from both). Has anyone done something like this before? ie Had a company with one Director/shareholder (who has servicing) and another shareholder who doesn't.

    Any thoughts and insights are much appreciated.

    Kind regards,
    Tom.
     
  2. Terry_w

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

    Joined:
    9th Jun, 2006
    Posts:
    29,619
    Location:
    Australia wide
    Transfer of shares will be a CGT event. But what is the value at that point is the question. Get the property valued now and then work out what the value of the shares is. It would be assets of company less liabilities.

    The shareholder should have held the shares on trust

    Solution might be a bare trust for the shares - but might be a bit misleading to the lender. Transfer title of the shares but not beneficial ownership = no CGT event.
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Sydney
    This issue should have been considered well before now. I would consider adding an extra DIRECTOR (not shareholder) and even having an agreement drafted which clearly sets out that the extra Director is dong so to assist servicing without any expectations of profiting. The lender should have the issue explained and the concern about the transfer of shares as transfer of DUTIABLE property also given advice. Hopefully the lender agrees to a mere addition of Director. The lender may likely agree to the additional Director and a guarantee from that person). If you REALLY want to confuse the lender also consider an ALTERNATE director. I did that to a bank and it confused the hell out of them. They went back to their legal adviser who basically agreed to the extra Director as the servicing solution and the role of alternative was limited to the time until the original Director regained employment and could service the loan. [s201K Corps Act.]

    Shares could be issued that give no right to dividends or capital etc and which have trivial rights (eg voting only) however OSR may still hold this to be a dutiable matter and a ruling may even be needed and a shareholder agreeement may assist. Check the constitution and seek legal advice. Best if shareholding is unaltered.