Is a ‘fresh’ entity for a development always best?
In some cases, it will be appropriate to establish a fresh entity to conduct separate property development activities undertaken by a taxpayer (or other unrelated activities carried on by the taxpayer), however, this will not always be the case. In this regard, consider the following:
- In some situations, the taxpayers involved in the proposed development may have previous experience in developing properties. In order to avoid the possibility that the eventual sales of the properties will be on revenue account, they may wish to establish a new entity that has never engaged in any property development (or any other) activities. However, it should be noted that the ATO (and the Courts) may look beyond the property development experience of the entity itself and instead focus on the property development experience of the individuals associated with the entity. Refer, for example, to Whitfords Beach case. This will mean that utilising a ‘fresh’ entity for the property development for this reason alone is not advisable. Refer also to Taxpayer Alert TA 2014/1.
- If there are carry forward losses in an existing entity, it may be appropriate to use the existing structure that can take advantage of those losses (or, for example, to set up a new trust that can distribute to an existing trust with losses). Of course, they will need to ensure that those losses will be available and consider the application of such issues as the trust loss rules (for trusts) or the continuity of ownership or the same or similar business continuity tests (for companies).
- Another issue to consider is GST. The sale of a property will only be liable to GST if it is a taxable supply made by an entity that is registered, or required to be registered, for GST. There may be situations where a property sale made by an unregistered entity would not require the entity to register for GST. However, if they are already registered, the sale will be liable for GST. This is because, once an entity is registered for GST, they are registered in respect of all enterprises they carry on or will carry on (i.e., an entity cannot separately register for each enterprise). In this situation, it may be worth acquiring the property in an entity that is not already registered and is not required to be registered for GST.