Where do you start with property development?
Many people outside the property industry would like to get ahead by successfully developing property, but don’t know where to start. With proper planning and the right property, taking the step into property development can be rewarding in the long term, as well as leveraging your equity in property into something bigger. However, “if it was easy, everyone would do it” as they say, and there are traps for the unwary.
Tax and Legal Advice
It is important to obtain taxation and legal advice before signing a contract to acquire a property or business, but when acquiring a property for development it is essential. How you hold the property, and how you structure the transaction can have large taxation and legal consequences.
What structure is the right one for property development?
Not every structure is right for every owner or developer. When deciding how to structure the transaction, you should consider things such as:
- Is the property already owned by one of the parties?
- What parties are involved? Is there one primary investor, or are there multiple investors? Will other related parties be engaged as contractors or consultants?
- How will the project be financed? Will all of the developed properties be sold? Will any be retained?
- How will the proceeds of sale be treated for tax purposes?
- Will the owner be registered for GST?
What if I get the structure wrong?
Consequences of getting the structure wrong can include:
- Penalties or legal liability – an owner of land can be liable for failure to comply with laws or contractual obligations during the development. This liability can extend to future buyers, government authorities, contractors, or where it is community title property, the body corporate. Examples of liability arising include where an owner makes incorrect disclosure to buyers, commits offences relating to the Environmental Protection Act, fails to carry out obligations in establishing the body corporate or even where the property contains defects or the builder fails to discharge their duties to the owner. A structure should be used that minimises the personal liability of key persons associated with the owner / developer.
- Transfer duty – Additional transfer duty to later transfer the property or development into a more tax efficient or legally sound structure.
- Tax – Large and unnecessary amounts of tax may have to be paid, either because the property needs to later be transferred into a more tax efficient structure, or because the development proceeds in an inefficient tax structure.
- Continuity in the event of the death or serious illness/injury to key persons – a structure should be used that allows for the quick replacement or removal of key persons where they die or suffer an accident or serious illness/injury. If a person holds the property in their own name and dies during the course of the development, it can result in significant delays while the personal representatives of their estate obtain probate (necessary to deal with assets in their name).
- GST – structuring and registrations may affect your ability to apply the margin scheme, or claim various input tax credits.
Get the right advice
Getting the right advice and implementing the correct structure at the outset will ensure you are entering into the transaction in the least risky manner from a legal and taxation perspective, if not actually saving you money.
Please note that this article is not to be considered as legal advice – it is provided as general information. If you require any assistance regarding property development, please contact us.
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