Developer Issues - Stamp Duty, Income Tax and Land Tax

Often a decision is taken to purchase properties from the joint venture that has developed the property.

Whilst this may mean that income tax, GST and stamp duty will be payable, the benefits of the transfer will generally include asset protection, 100% percent ownership and the ability to perhaps recognise the eventual sale on capital account.

Each decision to retain or acquire product needs to be determined on the relevant facts of each situation.

The sale of the property will give rise to a number of taxation implications, two (2) of which are income tax and stamp duty.

For income tax purposes, these acquisitions need to be done at market value. This is often based on the retail price or alternatively obtaining a independent valuation in respect of the property being acquired. On the basis that no commission or marketing costs will be incurred on these particular Lots, it would be commercial to discount the price accordingly.

For duty purposes the transfer will be assessed based on market value and duty applied according to the progressive rates below:



Normally duty is assessed on the value of each property transferred, not the aggregate value of all the properties where more than 1 property is transferred.

However, the State Revenue Office (SRO) are undertaking numerous audits of transactions over the past 4 years that seek to increase the amount of duty payable by the purchaser.

The main areas that the SRO are looking at are:
•    The potential aggregation of multiple properties purchased from a single development in an entity; and
•    The difference between the actual price paid for a property and the unencumbered value of the property

Aggregation of Properties

Under the Duties Act 2000, the SRO has the ability to aggregate dutiable transactions.  The Act states that dutiable transactions relating to separate items of “dutiable property” are to be aggregated and treated as a single dutiable transaction if the dutiable transactions occur within 12 months of each other, and the transactions together evidence that substantially there is one arrangement relating to all of the items or parts of the dutiable property.

These provisions are anti avoidance provisions where persons acquire property in parts to reduce the stamp duty, as stamp duty is assessed on a sliding scale (ie, the stamp duty would be higher on an aggregated value than it would be on multiple smaller values).

The Commissioner of State Revenue does have discretion not to aggregate where the transfers were separate lots "genuinely available for separate sale” (and the purchase of which was not dependent on the purchase of the other properties).

Under Revenue Ruling DA.026 it is suggested that where the purchaser enters into a contract to purchase more than one property and receives a discount, this discretion will not apply, and the aggregation rules will be enforced. In this case, the sale is considered to be under a single transaction even in the circumstance where the separate properties are purchased in different legal entities.

Unencumbered Value

The SRO may also consider any discounts received on the purchase of dutiable property, and deem the dutiable value of the transfer to be higher than the actual purchase price of the property.

The SRO calculates stamp duty on the “unencumbered value” of dutiable property, which is defined as the amount for which the property might reasonably have been sold in the open market at the time the contract of sale was entered into. This will need to be taken into consideration when a discount is applied to the purchase of a property, in addition to the aggregation rules outlined above.

Land Tax

It is important that the SRO is notified when a Trust acquires property.

Properties owned by Trusts are generally subject to a surcharge.

For 2011, the surcharge, applies to Victorian landholdings between $25,000 and $3 million. The surcharge is 0.375% for landholdings between $25,000 and $1.8 million.

The surcharge tapers away for trusts with aggregate taxable landholdings valued between $1.8 million and $3 million. The top rate of land tax (applying to taxpayers with landholdings valued above $3 million) is not affected by the surcharge.

The SRO needs to be notified within thirty (30) days of settlement and for practical purposes this notification is usually completed and lodged by the conveyancer acting for the purchaser.

Should you wish us to perform a review of your current Land Tax position please contact your Moore Stephens Relationship Partner to arrange a meeting.

Authors: Daren McDonald and Rachel Searle, Moore Stephens Melbourne.



Contact

Daren McDonald
T  +61 3 8635 1800
dmcdonald@moorestephens.com.au

www.moorestephens.com.au