Property Developers Beware! Trust Arrangements on ATO’s radar:
15 July 2016
With more and more property developments underway, property prices in Australia have escalated over the years. The industry has captured considerable attention by investors considering historically low interest rates that could reduce the mortgage liability and hence enticing a larger trading market. This surge in real estate prices gives one an impression that both the buyer and seller experience a win-win position.
However though the ATO has not been seemingly approving of the way some property developers have been trading by using the trust arrangement to reduce income tax payable. The government has been vigilant about this matter and have been scrutinizing every step taken by such property developers using a trust setup and the way the revenue from development proceeds have been accounted for.
Understanding a trust setup could be complicated in nature but for the scope of this article, a trust is a fiduciary arrangement between the trustee who operates towards the protection of an investment asset which is owned by the trust and the profits from its sale are to be distributed among its beneficiaries.
In the recent past, the ATO has been gathering information relating to an increasing number of property developers in the industry who establish such special purpose trusts to trade in real estate industry with the main business activity to be in the development and sale of properties. According to the ATO, property developers have been following this pattern of establishing the trust arrangement beforehand to carry out this activity. They then develop the property; hold on to it for 12 months and eventually sell and realize the profits in order to take advantage of the 50% capital gains tax discount. According to the ATO, revenue generated in this fashion with the intention of generating regular income depicts the usual course of business activity. This has to be accounted for as income from ordinary business operation and not as capital gain. For your awareness capital gains tax is payable in Australia upon sale of any such investment asset and bears the advantage of 50% discount on tax payable if it is held for at least 12 months before disposal.
Furthermore; to abstain taxpayers from this, active steps have been undertaken to overhaul the trading of such entities and making necessary adjustments where the right taxes have not been paid in the past. Such steps include ATO investigating the books thoroughly to check discrepancies in stated objectives of the trusts against the activities carried out. Where the ATO perceives a deliberate strategy adopted and returns been accounted for in a misleading way, heavy penalties will be imposed. In addition to this, warnings have been issued in Taxpayer Alert TA 2014/1 asking taxpayers to voluntarily come forward to disclose the facts and make appropriate corrections to their tax payables.
The focus is on historical transactions like previous properties bought and sold under similar circumstances, the occurrence of 50% capital gains tax discount claimed, the proposition of establishing the property and advertising it for sale or if the conditions outlined in the trust arrangement are not compliant with the activities of the investment trust. Based on these grounds, if the ATO perceives the movements to be business in nature and not a one off property transaction it is highly likely the ATO could review it. If the transaction was a one off sale then it could be a capital gain in nature. However, if the entire platform established appears to be a perpetual activity then the revenue would be subject to income tax and not capital gains. The ATO’s decision to review such tax returns would mean reviewing the activity carried out based on the documentation of the arrangement made and whether the investment was for a long term or shorter. In addition to this, compliance with accounting standards is not only crucial but also very important.
Hence, a capital gain discount would not be available in general terms. It is advisable to seek professional guidance given your circumstances. If you wish to know and discuss more, you could consider speaking to us further.