In our experience, people embarking on property development improve their tax and commercial position by documenting their intentions from the beginning. Ultimately, it’s beneficial to know what you are getting yourself into from the outset!
Sometimes this can be as simple as a one page deed outlining the intentions of the parties with the net result being a significant tax saving. By way of example we recently assisted a client who had incurred a duty charge of $22,400 which he did not understand or anticipate as a result of a property development he embarked on with his son.
The father and son had purchased a block as joint tenants with the intention of subdividing the residential block and building 3 brand new townhouses. From the outset, they intended for the father to retain two of the townhouses (T1 for the father to reside in as his home and T2 for investment) and the son to retain one of the townhouses (T3) for investment purposes. The father spent more money on the town house he intended to live in. Unfortunately, none of this information was documented. When the father and son came to the conclusion of their development and wished to transfer ownership of T1 and T2 to the father and T3 to the son, they were very surprised and disappointed with the duty implications that had arisen.
In this example, T1 had a market value of $1,100,000, T2 had a market value of $800,000 and T3 had a market value of $700,000. Because the father and son purchased the initial property as joint tenants, they owned the property in equal shares. However, the effect of the father receiving T1 and T2 and the son T3 was that the father received a share of 73% and the son 27%. In this case the father was required to pay duty on the additional 23% ($598,000) which came to a total of $22,420 which was unexpected and of course disappointing for the father. Unfortunately in this case it was too late to turn back the clock but we did provide the father with guidance for his next development venture.
In the above scenario and with the benefit of hindsight, the father and son should have purchased the property as tenants in common as to 70% share for the father and a 30% share for the son. Their intentions as to the development for the father to retain T1 and T2 and the son to retain T3 needed to be set out in an agreement before they purchased the land and embarked on the development. In this instance, the intentions of the parties would be clearly documented and the father would be obtaining the share of the property that was always intended without incurring an additional duty charge.
In addition to advice on duty we also provide useful and practical advice in the property sphere on GST, capital gains tax and the main residence exemption.