Around 60% of Australians invest in property – many with the goal of developing the property to make a profit.
Due to the costs involved, it’s common for multiple parties to combine resources for a development project.
One party may provide funding while the other provides construction and labour. Or one party may own the land, and the other contributes funding to develop it.
Whatever the case, the way these parties structure their relationship to carry out the project will impact when and how GST, stamp duty, and land tax are applied.
Brisbane-based partner and head of RSM’s national indirect tax practice, Sam Mohammad, recently held a webinar on how GST, stamp duty, and land tax issues affect property developers.
Here we discuss the Queensland tax regulations that apply to non-trust structures, to help you decide if a partnership or joint venture is best for your next development.
Establishing a partnership for a property development
Partnerships are a popular structure for property developments because they are well understood and relatively cheap to implement.
They also act as a flow-through vehicle; if the project makes a profit, each partner receives their share as income. If it makes a loss, each partner can claim their share of the losses. This is different to a trust where losses are often trapped.
As a legal business entity, a partnership has its own ABN and must be registered for GST. The partnership can be set up for a single project, or be retained into the future for multiple projects.
For tax purposes, there are 2 types of partnerships: general law partnerships and tax law partnerships. General law partnerships are the most common and involve people carrying on a business together. A tax law partnership exists where two or more people receive income jointly.
When thinking about establishing a partnership for a property development, here are the main tax elements to consider:
GST and partnerships
The greatest disadvantage of a partnership is that both parties are liable for the GST owed when the property is sold.
For example, let’s say Mr. A and Mr. B enter a partnership to develop a block of land. Mr. A will provide funding and Mr. B will provide construction and labour. All profits will be split 50/50. At the end of the project, the property is sold and both parties take their profits. Mr. A pays his portion of the GST, but Mr. B has had trouble in another business venture and uses his profits to pay off debts. He no longer has the money to pay his GST portion. The tax office will then approach Mr. A to pay the outstanding debt. Because the relationship is a partnership, Mr. A is just as liable for Mr. B’s unpaid GST – which eats up a hefty portion of his profits.
On a more positive side, a general law partnership can usually apply for the margin scheme if certain conditions are met.
Stamp duty and partnerships
The rules for stamp duty differ greatly depending on which state the property development is in. QLD is relatively complex when it comes to stamp duty and partnerships, with any change to the partnership triggering a stamp duty cost.
- when the land is acquired
- if the equity of the partnership changes (i.e.: from 50/50 to 60/40 where 10% is then due)
- if a partner leaves the partnership
It’s important to plan ahead for these possibilities if you intend to enter a partnership to develop property in QLD.
Land tax and partnerships
In QLD, each individual in a partnership is separately assessed for land tax based on their aggregate assets.
In some cases, the commissioner can issue a single assessment. This could happen if there are multiple parties in the partnership, yet 2 parties (such as a couple) could be seen as a single entity for land tax purposes.
Establishing a joint venture for a property development
An unincorporated joint venture (JV) can produce significantly different tax outcomes to a partnership.
A typical scenario for a JV could be when a land owner wants to develop their property. They retain full rights to the land, but establish a JV with a development company to develop it. Both parties then take a share of the profits when it’s sold.
Because joint ventures are usually more favourable from a tax perspective, many developers are keen to utilise them. However, the specifics of the relationship must align with the legal characterisation of a JV, otherwise it could be deemed to be a partnership regardless of any agreements.
Key aspects of a joint venture include:
- The land owner retains legal ownership of the land
- Land is transferred to a buyer once it is developed
- Each party pays GST separately
- The JV is formed for a single endeavour, not ongoing
- Finance and costs are born separately
- A manager is appointed to act on behalf of each party
Unlike a partnership, there is no separate legal entity with an ABN and GST registration. However, for this reason it’s imperative to create what’s known as a “Development Management Agreement” or DMA.
A DMA lays out how the JV will work and keeps all parties on track to make sure they act in a way that’s consistent with a JV. It’s worthwhile consulting with a trusted advisor when you create a DMA. The advisor can provide guidance on what to include and what to be wary of – such as any caveats that could see the JV being classified as a different structure for tax purposes.
Here are the main considerations when it comes to GST, stamp duty, and land tax for a joint venture:
GST and joint ventures
In a joint venture, GST only applies when the property is sold. The land owner can seek to apply the margin scheme, and input tax credits also apply.
While the developer is liable for GST on any development fees paid to the land owner, these are not due until the property is sold.
Most importantly, GST is completely separate – so unlike a partnership, there is no joint liability.
Stamp duty and joint ventures
Like GST, there should be no stamp duty under a JV except when it is sold to the end buyer.
It’s important to note that this is an evolving space though. In Victoria, there are “economic entitlement” provisions that practically make most property JVs uneconomic because the developer’s development fee will be subject to duty. Thankfully, no other state or territory has adopted these rules so DMAs remain attractive but this is subject to change as state and territory governments look for new revenue sources.
Land tax and joint ventures
Land tax is assessed based on ownership of the land, so is generally the responsibility of the land owner.
However, land tax is defined as the responsibility of whoever occupies and possesses the land at the end of the financial year. If clauses in the DMA require a developer to “take possession of the land”, there is a risk that the developer could be assessed for land tax.
Should you choose a partnership or a joint venture?
There is no perfect answer to which structure is best between a partnership and a JV – especially when you consider the realm of other options, including trusts.
Ultimately, the only way to not pay tax on a property development is to make a loss. So if your goal is to make a profit, the best structure is the one that best aligns with your intentions while being as tax efficient as possible.
Getting advice from a tax specialist will help you make an informed decision on which structure to choose, so you can embark on your project with confidence.