Property development arrangements have been on the ATO’s radar for a very long time and we are currently seeing audit activity looking at the GST treatment of joint venture (JV) arrangements.
One of the problems with understanding JVs is that the term itself is used in a number of different ways. Let’s explore that.
An Incorporated JV can simply be an arrangement between parties that they will undertake a commercial activity through a company which may own the relevant property. So you could have two or more shareholders in that company.
An Unincorporated JV is a different beast – it is a contractual arrangement between two or more parties to undertake a particular commercial activity and commonly involves some parties contributing property (or the use of property) which they remain the owners of.
A common question that comes up at this point is, if a JV is an arrangement between two or more parties, how is it different to a partnership?
A partnership is where two or more people are in business together with a view to sharing profit. Tax law states that two or more people in receipt of income jointly will constitute a partnership for tax purposes. A common example of a partnership for tax purposes is where two or more people jointly hold a rental property. They are in receipt of rental income jointly from the property they own and therefore they constitute a partnership for tax purposes.
In a JV, on the other hand, the participants don’t share profits – they each have an entitlement to the output of the undertaking. For example, a land owner might contribute vacant land to a joint venture together with preliminary work performed to seek approval for a development, while a builder then obtains further approvals and builds properties on the land. The finished properties are then distributed equally to each of the participants of the JV to do with as they wish. They might choose to live in the completed properties, rent them or sell them.
From a tax perspective, each participant accounts for their tax treatment separately, given that the (unincorporated) JV is not a separate taxpayer. In other words, there are two or more separate entities, not one combined entity (like a company) with shareholders.
JVs can also simplify the way they account for GST externally and internally where revenue is connected to the JV activity by establishing a GST JV. According to the ATO’s GST regulations, GST JV purposes include ‘the design, or building, or maintenance of residential or commercial premises’. This does not include land subdivision.
JVs, if structured correctly, have a number of benefits over other structures, such as partnerships. The parties in a JV can adopt their own tax treatment for their participation in a JV and they are not jointly and severally liable. If the JV is structured so that there is no need to transfer property, duty and tax costs may be avoided or deferred.
The possibility of CGT, stamp duty and other tax costs at the completion of the project needs to be carefully considered. As a general rule, if you are dealing with real property and accept that a true JV requires a sharing of output, rather than profit, this may require a change in ownership interests in the property that can trigger tax costs. The structure and documentation of a JV of this type will likely determine the timing of these costs.
For instance, because transferring land will trigger stamp duty to the buyer and CGT to the seller, it may be beneficial to trigger the transfer at the beginning of the project where the value of land may be at its lowest point to minimise both stamp duty and CGT. Conversely, it may work as well at the end of the project once all development costs have been factored into the project. The key here is to plan the project carefully and in detail from the outset so you can make any land transfers necessary at the most advantageous time of the development.
The income tax treatment of the JV by the parties will depend on the actual arrangements entered into and the extent of the property development being undertaken.
If you are considering a JV for your property development and are unsure what best suits you, please get in touch for a complimentary chat.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries
https://adpartners.com.au/wp-content/uploads/2017/08/logo.png00Tony Dimitriadishttps://adpartners.com.au/wp-content/uploads/2017/08/logo.pngTony Dimitriadis2018-04-25 21:48:322019-05-12 04:25:30What is a joint venture?
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