A special purpose vehicle (SPV) is a separate formal structure (either a company or a trust) that brings together separate parties, such as a developer and an investor, for the purpose of a property development.

These property developments usually exist for a defined time period and are generally born from the developer having the idea for a project and the investor, liking the idea, investing in the project. At the completion of the project, each party then goes their own way.

SPVs can be a beneficial structure when you would like the return from a development to be classified as the realisation of a capital asset, rather than a revenue-generating activity. However, in order to access the CGT concessions, the SPV would need to be in a trust structure, as companies cannot access the CGT concessions.

The reason for this is that an SPV would be legally separate from any other revenue-generating property development activities being carried on. Therefore, it could be argued that the new SPV is a clean slate, unaffected by previous property developments and demonstrating the intention to realise a capital asset from day one.

If external factors cause you to sell the development much earlier than the build-and-hold strategy anticipated then, unless the ATO can prove otherwise, the initial capital intention may still hold up, even if the property has only been held for a relatively short period of time (remembering that you would need to hold the asset for a period of 12 months to access the 50 per cent CGT discount).

The factors that the ATO would look to investigate in order to prove a revenue-generating development, rather than one on capital account are:

  • The parties have experience in property development, selling property and construction and the underlying purpose may be for development and sale.
  • Finance documents for the development may indicate the dwellings, once complete, will be sold within a certain time period in order to repay part or all of the loan.
  • Communication with local authorities granting building approvals may describe the activity as being a development of property for sale.
  • Real estate agents may be engaged early in the development process, along with advertising being undertaken.
  • The property/s are sold very soon after the 12-month CGT concession period.

All the above factors may provide the ATO with enough evidence to suggest that the intention from the outset of the development was a profit-making venture or scheme, and therefore taxable on revenue account with no access to the 50 per cent CGT concession.

However, keep in mind that this is a complex area and should be discussed with your accountant or financial adviser. The ATO has made clear its intention to audit developers to determine if they are accounting for their transactions in accordance with tax law, with penalties of up to 75 per cent of the tax avoided, in addition to the requirement to pay the avoided tax, for deliberate avoidance cases.

In these cases, the ATO is saying that the correct tax treatment is to tax profits as revenue and not as capital, and that an SPV arrangement is a contrived attempt to use trusts (in particular) as vehicles to access the CGT discount.

In other words, the ATO may believe that the trust is set up to try and isolate what might otherwise be a natural part of the other commercial property transactions you undertake.

The ATO may also believe that you justify capital account treatment on the strength of your claimed intentions to build and hold for income-generation purposes, and that subsequent transactions that appear more consistent with build and sell strategies are explained as being driven by changed circumstances.

The commercial reality is that there will be activities that start out as being capital in nature and then require a change for various reasons. These could be due to cash flow issues or changed market conditions. The change itself is not necessarily the problem if there is a genuine commercial explanation which has contributed to it.

In any case, if you set out your intention in SPV documents, it is likely to be a good starting point. Be as prepared as you possibly can.

If you would like to discuss a potential property development and what may best suit your circumstances, please get in contact with us for an initial chat.

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