Lack of progression on property tax

The current political environment is being blamed for the delayed release of the Federal Government white papers on tax reform and the federation model.

The Federal Government released the 2015 Intergenerational Report (IGR) on 5 March 2015, albeit slightly later than the required publish date of January 2015. The report assesses the long term sustainability of the government’s policies over the next 40 years, taking into account the financial implications of demographic change. The report outlined a dramatic increase in the life expectancy rates, raising questions around how the government will fund an ageing population and what future communities should look like.

The release of the IGR is seen as a positive step forward in the stalled tax reform process but there is still no announced delivery deadline for the tax white papers.

The proportionate tax burden borne by the Real Estate &Construction Industry means the topic of property taxes and their impact on the economy is more relevant than ever in the current market. The delayed release of the white papers denies the industry the opportunity to have an informed debate on the current model and highlight the need for wider tax reform at the federal and state level.

Australia’s growing population, coupled with limited land supply releases in major urban areas and the cost of bringing new product to market (including government taxes, fees and charges), continue to put pressure on housing affordability. It will take collaboration at all levels of government to address this important issue and it is hoped the white papers may be a catalyst for this.

To read more about the impact of property taxes and their impact on the Real Estate and Construction Industry please click here.

Developers beware

In a recent case involving joint venture participants and a development that spanned multiple land titles with different owners, the importance of structuring of joint venture arrangements was highlighted in a Full Federal Court decision. (Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation [2015] FCAFC 4).

Briefly, the facts involved Taras Nominees contributing land to the joint venture for which it did not receive any monetary consideration. The contribution of the land was legally effected by transferring the land title to another company that held the land both in a trustee capacity and as nominee of the joint venture.  The Full Federal Court upheld the decision of the Federal Court and determined that the land had been disposed of, the outcome being that capital gains tax was payable by Taras Nominees much earlier than anticipated.

Joint ventures that are undertaken for property development can be complicated arrangements and it is recommended that taxation advice is sought to consider the appropriate structure and relevant tax triggers before any documentation is commenced. 

Another tax on the horizon

One tax reform that is in on the watch list is a proposal by the Federal Government to proceed with a 10% non-final withholding tax on the disposal, by foreign residents, of certain ‘taxable Australian property’.

The measure was originally contained in the Labor Government's 2013-14 Federal Budget and is set to start from 1 July 2016. The measure is a collection mechanism to support the operation of the foreign resident capital gains tax regime.

Under the changes, the payer (i.e. the purchaser) in a transaction will have an obligation to withhold 10% of the proceeds payable to the vendor in relation to the transaction where:

  • the vendor is a foreign resident; and
  • the transaction involves an asset that is ’taxable Australian property’.

The measure will not apply to residential property transactions under $2.5 million or to disposals by Australian residents.

The non-final withholding tax will apply regardless of whether the gains on disposal are subject to tax under the capital gains tax regime or are subject to tax because the gains constitute ordinary income.

Stamp duty – watch out for developer contributions

Late last year, Lend Lease lost its High Court appeal against a $20 million stamp duty assessment in a landmark decision which has broad implications on land transfer deals.  This decision will affect developers contemplating a transaction that involves payments separate from the agreed consideration for land.

In brief, VicUrban transferred undeveloped land to Lend Lease in stages between 2006 and 2010.  Under the deal, Lend Lease was required to make contributions to the infrastructure at Docklands, largely on land that it did not own or purchase.  As a result, VicUrban and Lend Lease agreed they would share the proceeds from the sale of the land developed by Lend Lease, which was referred to as Contribution Payments.

The Victorian State Revenue Office stepped in and assessed stamp duty not only on the purchase price of each parcel of land but also the value of the infrastructure contribution payments.

The High Court's decision sets a landmark precedent for all property developers across Australia and careful consideration will need to be given to projects involving the exchange of mutual promises.