Investors ask: Tax implications of development
“I’m looking to abolish my existing primary residence and develop a number of units (currently individual ownership structure) with a partner. We are looking at setting up a company structure to do the development. What are the legal and tax implications that I would need to be aware of?”
As a starting position, a dwelling first established as a Main Residence has the benefit of being exempt from Capital Gains Tax when sold for more than the cost base.
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The tax position on demolishing the dwelling and developing a multi unit development depends on ‘intention’. Where the intention is to develop the units for resale at a profit, it will be considered you are ’carrying on the business’ of development. As such the profit will be taxed as business income at your marginal rate of tax.
Timing the sale of the units between financial years can help reduce the tax and provide more time to pay it. Also, it will be necessary to register for GST, which will be payable on sale while credits from purchases will be refundable during the construction period.
Where the intention is to construct dwellings for rental, no GST is registration is required. Capital Gains discount of 50% is available on eventual sale.
With liability limited to its share capital, a company with capital of say 10 x $1 shares is a suitable vehicle to conduct a risk activity of property development. Alternatively a unit trust with a corporate trustee would also work.
Risks associated with a joint venture development include, determining who owns what at completion, providing security for loan funding, maintaining the Main Residence Exemption from Capital Gains of at least one of the units, splitting profit equitably, recovering capital contribution and a few more.
Due to the complexity of the arrangement, consult your property tax specialist on the options available. Clear documentation of intentions and agreement between the partners will minimise disputes and disgreements.
Shukri Barbara, Principal Adviser, Property Tax Specialists