Property developers beware
Recently the ATO released a taxpayer alert1 warning property developers about using a special purpose trust to inappropriately claim capital gains tax concessions (e.g. the 50% CGT discount) on the eventual sale of a property that had been developed by the trust.
Typically such an arrangement would involve a property developer establishing a special purpose trust for the stated purpose of acquiring, developing and holding property to generate rental income (i.e. that the arrangement was on capital account). On the sale of the developed property (usually just after holding the underlying property for at least 12 months), they would claim the 50% CGT discount.
However, various other factors2 may indicate that the transaction was in fact on revenue account and hence no CGT discount should have been available on the sale of the property.
How does this affect you?
The ATO is currently auditing property developers engaged in such activities – they have already raised millions of dollars in adjustments (e.g. clawing back the CGT discount claimed) and expect to make many more adjustments in the coming months.
To make matters worse, if you have been involved in such an arrangement, not only can the ATO correctly assess you on revenue account, but they can also apply penalties up to 75% of the tax avoided.
How can we help you?
All clients engaged in property development transactions would be well advised to take note of this ATO warning – especially because of the big dollar amounts typically involved in property transactions.
Although this alert only singles out special purpose trusts, it is not unfathomable that the ATO will extend its net to investigate any property transactions that were classified as on capital account (i.e. where the CGT discount was claimed on the sale of the property).
We would therefore recommend that if you have recently sold a property on capital account or intend to sell a property in the near future, that you speak to a Nexia Advisor.
That way we can perform a financial health check on your business to analyse your past transactions (and make voluntary disclosures where appropriate to mitigate penalties) as well as advise you on future transactions (by providing our considered opinion, or where it is a close call, helping you apply for a private ruling to determine the revenue or capital nature of the arrangement).
If you have any questions about anything raised in this article, please contact your Nexia Advisor.
1 - TA 2014/1: Trusts mischaracterizing property development receipts as capital gains
2 - Whether a transaction is on revenue or capital account involves an analysis of various factors to determine the true substance of the transaction (e.g. if real estate agents were contacted to market the property and bank documentation shows that the property was intended to be sold within a certain time, this may seem like a transaction on revenue account).