Determining the optimal tax structure for undertaking a property development activity
As with any business or undertaking, there are several structures available for property developers (e.g., sole trader, partnership, joint venture arrangement, company, and trust, or a mix of those structures). In some cases, the proposed structure may be limited by the existing land ownership. Furthermore, there are many different types of ‘property development’ activities for which a (new) structure may be required. For example, a property development may be undertaken by any of the following entities in the following situations:
- Mum and Dad may decide to subdivide their large suburban property, keeping part of it for their main residence.
- Children may have inherited their parents’ land and decide they will equally divide it between them, with one intending to build a home to live in and others intending to sell their shares.
- A farmer may decide to realize the increased value of their land by subdividing it and selling lots or completed units.
- Friends may purchase rundown properties to fix up and sell or rent.
- A developer may be in the business of developing properties, whether as a landowner, a builder, or both.
Deciding on the best structure for undertaking a property development requires a balance to be achieved between the taxpayer’s needs and circumstances and any tax considerations. This inevitably involves weighing up the relevant considerations (and their importance to the parties), including asset protection, financing requirements, and of course, the administrative complexity and costs associated with the relevant structure. It is important to be aware that there is no ‘one size fits all’ structure that is optimal for all developers. Instead, tax practitioners will need to carefully weigh up all relevant factors when tailoring a structuring solution that best suits their client’s needs.