Unitary Plan Opportunities
Landowners often can’t qualify for finance without committing to sell some of the units they develop, and this creates interesting tax issues, writes Mark Withers.
4 April 2022
Changes in planning rules are resulting in more and more landowners investigating the possibility of undertaking infill housing developments, often with multiple units and without carparking on single sites.
Often investors approach these projects with a desire to retain and rent the dwellings they develop. However, lending criteria for developments such as this means frequently landowners can’t qualify for finance without committing to sell some of the units they develop. This scenario of keep some, sell some, provides some interesting tax planning issues.
The most significant issue can be found in section CB 15 which serves as an antiavoidance provision by taxing gains on any property an associated person to a developer sells if that property emerged from revenue account property of a development entity.
This effectively creates a perpetual tainting for any property acquired by someone associated to a developer for property that was development stock of that developer.
Just to be clear, that’s not a 10-year time limit - there is no time limit! So, it becomes vital to plan arrangements to isolate property developed for sale from property developed to retain. Investors should seek tax advice early on with respect to strategies to overcome these issues.
‘Think very carefully about the amenity value of what you are creating, less is often more when it comes to lifestyle and liveability’
The key to this planning is being certain about exactly what will be retained and what will be sold. In these circumstances bright-line may be an issue as well, but the specific land taxing provisions all need consideration.
Interestingly, when a subdivided title emerges from a development, the fiveyear count does not begin again from the point of issuance of the new title, it remains from the point of acquisition of the undivided land.
GST issues must also be considered. The subdivision or development of land and buildings for disposal where it is continuous and regular is a registerable taxable activity for GST.
Complications again exist where units are developed for residential, as this activity remains exempt where the buildings will be rented rather than sold. Where land use is changed to development for sale, there may be the opportunity to recover GST on the original purchase of the land, but only where the land was not acquired from an associated party.
This means that restructuring land into a development entity will often mean the loss of the ability to claim GST on the developer’s land cost. GST though, is still payable on sale, so again, careful planning is needed to weigh up the restructuring options.
Investors who come to development often struggle with the financial modelling and critical path management necessary to determine whether their project is viable or not. The most fundamental message to send is to get the facts, get the facts, get the facts. Spend money on costing the project properly before you commit to it. Just because you already own the land that is no guarantee that your project is viable.
The intensity of some of these infill developments and the consents to build them without parking also creates risk. Just because you can build five units with only two carparks, doesn’t necessarily mean it’s as sensible as building three with carparks. Think very carefully about the amenity value of what you are creating, less is often
more when it comes to lifestyle and liveability.
Remember, it’s not only you who has the opportunity now to undertake these projects; the developer, who adds to supply, is the natural born foe of the investor (who does best when supply is limited).
As always, seek advice, particularly on tax and GST and structuring before you get too far down the track.