Tax

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Australian Financial Review quoting SME Property Lawyers on the new withholding tax rules affecting property transactions valued $2 Million or more.

by Andrew Kleiman on May 31, 2016 No comments

Click on this link to read a Australian Financial Review article quoting SME Property Lawyers on the new withholding tax rules affecting property transactions valued $2 Million or more.

From 1 July 2016 all purchasers will need the express right to withhold the 10% if the vendor does not provide a clearance certificate from the ATO confirming the vendor is not a foreign resident. The NSW Law Society has prepared an updated REINSW Contract for Sale (2016 edition) to deal with the new withholding tax rules.  But, as with the superannuation reforms, there is an element of retrospectivity. The terms of option contracts are fixed and signed years ago using contract terms that do not allow the purchaser to withhold 10%, but these contracts are still caught by this change. So when an option is exercised, the purchaser may have a legal duty to withhold 10% of the purchase price and pay it over to the ATO, but this will be a breach of contract with the vendor who could refuse to settle unless a 100% is paid.

It is mostly property developers who use options – to accumulate development sites – and will be caught by the retrospective element.

It won’t be an issue where the vendor wants the developer to complete the sale, but say the developer has spent $1M on a DA causing the value of the property to rise. Perhaps the vendor will be motivated to terminate the contract and re-sell at a higher price with the DA to someone else. The developer’s contract terms were decided when the option was signed so he can’t change them.  If the developer can’t pay the 100% to the vendor but the contract doesn’t allow him to withhold the 10% then the vendor could refuse to settle and terminate.  Or, more likely, take advantage of the trap the developer is caught in to extract some leverage i.e. more cash from the developer.

The ATO has pointed us to certain provisions in a schedule to the Taxation Administration Act that could be used to shelter developers from a breach of contract claim where the breach is required in order to comply with tax law. Our view is that you do not want to have to rely on some obscure provision at the back of tax legislation when near the pointy end of settlement. We hope the ATO will come out with some comfort for developers caught out by this change of law.

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Andrew KleimanAustralian Financial Review quoting SME Property Lawyers on the new withholding tax rules affecting property transactions valued $2 Million or more.

Mischaracterising property development receipts as capital gain

by Andrew Kleiman on August 11, 2014 No comments

The ATO has released a taxpayer alert on those using trusts to mischaracterise the proceeds of property development as capital gains rather than income on revenue account in order to access the 50% capital gains discount. The alert can be read at: TA 2014/1

The ATO states in its alert:

“This Taxpayer Alert applies to arrangements which display all or most of the following:

 1. An entity with experience in either developing or selling property, or in the property and construction industry, establishes a new trust for the purpose of acquiring property for development and sale.

 2. In some cases the trust deed may expressly state that the purpose of the trust is to hold the developed property as a capital asset to generate rental income. In other cases the trust deed may be silent as to its purpose.

 3. Activity is then undertaken in a manner which is at odds with the stated purpose of treating the developed property as a capital asset. For example:

  • Documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain timeframe and that the proceeds are to be used to repay the loan.
  • Communication with local government authorities overseeing building approvals may describe the activity as being the development of property for sale.
  • Real estate agents may be engaged early in the development process, and advertising to the general public may indicate that the dwellings/subdivided blocks of land are available to be purchased well in advance of the project’s completion, including sales off the plan.

4. The property is sold soon after completion of the development, where the underlying property may have been held for as little as 13 months.

5. The trustee treats the sale proceeds as being on capital account, and because the trustee acquired the underlying property more than 12 months before the sale, it claims the general 50% capital gains tax discount (in other words, it treats the gain/profit in respect of each sale as a discounted capital gain).

On the face of it, the ATO is giving notice of audit treatment to experienced property developers not to pose as investors by characterising developments for sale as construction for rental investment in order to claim the 50% capital gains discount when the development is completed and sold.

But the alert comes off the back of the recent decision in August v Commissioner of Taxation [2013] FCAFC 85.  The decision can be read here and is a warning for less dissembling investors who develop a property with the intention to hold as a long-term investment but subsequently change their mind and sell the property for a profit after development is complete. To better ensure the property is treated a capital asset rather than trading stock they need to ensure that all documentation in relation to the property (purchase, financing, development, ownership, management, leasing, selling etc) is consistent with their stated intentions and that they can provide the ATO with that documentary evidence and documentary evidence that the decision to sell was a change of mind for a bona fide reason such as an offer to good to refuse or a change in their financial circumstances. Moreover their actual words and actions must be consistent with that  documentary evidence.  Investors purchasing property with a mind to potential development and sale down the track should seek professional tax advice at the outset.

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.

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Andrew KleimanMischaracterising property development receipts as capital gain