PROPERTY

DEVELOPMENT:
PRACTICAL INCOME TAX,
CGT AND GST ISSUES
Property development: Practical income tax,
CGT and GST issues
Written by:
Ron Jorgensen, CTA
Partner
Rigby Cooke Lawyers

VIC Division
19 / 20 May 2016
Leonda By The Yarra, Melbourne / Mercure, Geelong

Ron Jorgensen 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute.
The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The
material and opinions in the paper should not be used or treated as professional advice and readers should
rely on their own enquiries in making any decisions concerning their own interests.

Ron Jorgensen

Property Development - Practical Income Tax, CGT and GST Issues

CONTENTS
1

Introduction .................................................................................................................................... 3
1.1

Overview ................................................................................................................................... 3

Introduction to Taxation ................................................................................................................ 4

2.1

Overview ................................................................................................................................... 4

2.2

Trading stock ............................................................................................................................ 5

2.3

Profit making schemes.............................................................................................................. 7

2.4

Capital gains tax ....................................................................................................................... 9

2.5

Differences in expense treatment ........................................................................................... 10

2.6

Mere realisation ...................................................................................................................... 10

Introduction to structuring .......................................................................................................... 11

3.1

Tax planning ........................................................................................................................... 11

3.2

Landowner entities .................................................................................................................. 12

3.3

Restructuring ........................................................................................................................... 13

3.4

Development entity ................................................................................................................. 13

3.5

Builder entity ........................................................................................................................... 14

Practical Examples ...................................................................................................................... 17

4.1

Main residence projects .......................................................................................................... 17

4.2

Mixed investment and sale projects ........................................................................................ 18

4.3

Private property syndicate projects ......................................................................................... 19

4.4

Partition and exchange and in-specie distribution projects .................................................... 20

4.5

GST residential development classifications .......................................................................... 21

4.6

GST going concern project disposals ..................................................................................... 22

Glossary ........................................................................................................................................ 24

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1 Introduction
1.1 Overview
The distinction between property development and property investment is often difficult to divine in
practice.
Property development is used to mean the development of property for the purpose of sale (including
subdividing the familys acre block, broad acre subdivision and high-density strata developments).
Property investment is used to mean the development of property for the purpose of retention and
use to derive assessable income (including as premises of a trading business and to derive rental).
The diversity of a property project makes it impossible to deal comprehensively with the topic in a
paper of this nature.
This paper uses examples to illustrate and explain the income tax, CGT and GST treatment of
common property development transactions including:

distinguishing between and the taxation of trading stock, profit making schemes and capital
gains property development;

the selection of ownership and development structures to undertake property development;

main residence projects;

mixed investment and sale projects;

private property syndicate projects;

partition and exchange and in-specie distribution investment projects

GST residential development classifications

GST going concern project disposals

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2 Introduction to Taxation
2.1 Overview
The income taxation of a property project is complex as up to three taxation regimes may apply to
levy tax. The transfer of land may be taxable:
1.

as a disposal of trading stock of a property development business;

2.

as a profit making scheme; or

3.

as a taxable gain on the disposal of a CGT asset.

The application of these regimes leaves little scope for the transaction to be considered a non-taxable
4
mere realisation of a capital asset. It is usually only simple developments of pre-CGT Assets that
will qualify for this treatment.
Accordingly, most analysis by practitioners concerns whether:
1.

the taxpayer is carrying on a business of property development (i.e. whether the trading stock

2.

rules apply);
the taxpayer had a profit making motive at the time of acquisition (i.e. whether there is a profit

3.

making scheme); or
5
a specific statutory provision (e.g. profit making undertaking or plan) applies.

The trading stock regime provides an exclusive regime for the taxation of land that constitutes trading
6

stock. The CGT regime expressly exempts trading stock (i.e. land) from being a CGT Asset. The
trading stock regime only operates on stock held in the ordinary course of business. Accordingly, the
trading stock regime and the profit making scheme regime (which has a residual operation for
7
revenue assets that are not trading stock) or the CGT regime (which operates for capital assets)
cannot operate concurrently.
Where the acquisition of land is for a profit making purpose, the land is considered a revenue asset
8
and its realisation a revenue profit. However, the fact that the land is a revenue asset does not
9

preclude it from being a CGT Asset. Land is a concurrent CGT Asset. Accordingly, the profit making
scheme regime and the CGT regime apply concurrently. The ordinary income regime has legislative
priority over the CGT regime, because, where a receipt is taxable as ordinary income and a capital
10
gain, the capital gain is reduced by the amount of the revenue profit. Where the net profit under the
profit making scheme regime is calculated differently to the CGT regime, concurrent taxation
operation is arguable possible.

Div. 70 ITAA 1997.

Sec. 6-5 ITAA 1997.
3 Pt 3.1 and 3.3 ITAA 1997.
4 i.e. land acquired before 20 September 1985.
5 Sec. 15-15 ITAA 1997; previously sec. 25A ITAA 1936.
6 Sec 118-25 ITAA 1997.
7 R. Parsons, Income Taxation in Australia, Law Book Company Ltd, 1985, para 12.3.
8 R. Parsons, Income Taxation in Australia, Law Book Company Ltd, 1985, e.g. para 12.8; FCT v Myer Emporium Ltd [1987] HCA 18.
9 Sec. 108-5(1) ITAA 1997 defines a CGT Asset as any kind of property and does not exclude revenue assets that are not trading stock.
10 Sec. 118-20 ITAA 1997.
1
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If these provisions do not apply, the adviser must determine whether:

1.
2.

the CGT provisions apply; or

the realisation will be a non-taxable mere realisation.

2.2 Trading stock

Trading stock includes articles acquired for the purpose of manufacture, sale or exchange in the
ordinary course of business. Land may be trading stock for tax purposes.
A taxpayer will account for trading stock on the following basis:
1.

11

12

acquisition and ancillary costs (e.g. development costs) of purchased trading stock are an
allowable general deduction13 in the year the trading stock is held for use in a business;

14

and

2.

disposal consideration of trading stock is assessable income in the year of disposal of the
15
trading stock; and

3.

where the opening trading stock value (e.g. the previous year 30 June closing trading stock
16
value) exceeds closing trading stock value (e.g. the current year 30 June closing trading stock
17

4.

value), an allowable general deduction is incurred; or

where the closing trading stock value (e.g. the current year 30 June closing trading stock
value)

18

exceeds opening trading stock value (e.g. the previous year 30 June closing trading

stock value), assessable income is derived.

19

Vacant land will constitute trading stock in globo even before it is converted into a subdivided and
improved condition for sale.

20

trading stock upon subdivision.

In globo trading stock will become converted to individual articles of

21

The key factors to weigh in determining whether the particular property project was part of a business
of property development are:
1.

the taxpayers purpose in acquiring and carrying out the project;

2.
3.

the taxpayers history of property development or investment;

24
the extent of personal involvement of the taxpayer;

4.

the reasons for developing the land;

22

23

25

FCT v St Huberts Island P/L 78 ATC 4104; (1978) 8 ATR 452.

Sec. 70-5 ITAA 1997.
13 Sec. 8-1 ITAA 1997.
14 Sec. 8-1 & 70-15 ITAA 1997.
15 Sec. 6-5 ITAA 1997.
16 Sec. 70-40 ITAA 1997.
17 Sec. 70-35 ITAA 1997.
18 Sec. 70-45 ITAA 1997.
19 Sec. 70-35 ITAA 1997.
20 FCT v St Huberts Island P/L 78 ATC 4104; (1978) 8 ATR 452.
21 Barina Corporation Ltd v FCT (1985) 4 NSWLR 96.
22 FCT v Whitfords Beach P/L [1982] HCA 8 (new shareholders intent to develop) & Stevenson v FCT 91 ATC 4476; (1991) 22 ATR 56 (change in
development purpose).
23 FCT v Whitfords Beach P/L [1982] HCA 8 (new shareholders had a history of developments) & Crow v FCT 88 ATC 4620; (1988) 19 ATR 1565 (multiple
successive history of development).
24 Stevenson v FCT 91 ATC 4476; (1991) 22 ATR 56 (significant involvement of landowner); cf Casimaty v FCT 97 ATC 5135; (1997) 37 ATR 358 (most
aspects delegated to contractors and agents).
25 FCT v Whitfords Beach P/L [1982] HCA 8 (systematic for a profit); cf Casimaty v FCT 97 ATC 5135; (1997) 37 ATR 358 (piecemeal as increasing debt
and deteriorating heath dictated).
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26

5.

the duration of ownership;

6.
7.

the scale of the sub-division; and

28
the extent of any construction work undertaken.

27

Reasonable practitioners may differ on whether a particular property project was a property
development business when weighing these factors resulting in potential dispute with the ATO.
Reasonable practitioners may differ on ddetermining the cost of land and improvements during a tax
period and allocating costs to individual articles of trading stock upon subdivision resulting in potential
dispute with the ATO.
The concept of cost is directed at ascertaining the costs incurred in the course of a taxpayers
materials purchasing and manufacturing activities to bring the article to the state in which it became
29

trading stock held. It arguably excludes expenses and overheads that do not have a relationship
with production (e.g. marketing, distribution and selling expenses and general administration
30

31

expenses).
Although many of these costs will be otherwise deductible, there are a number of
expenses that may neither be included in the cost of trading stock nor deductible as a general
business outgoing.
Generally, the following costs of subdivision should be characterised as part of the cost price of the
broad acres before subdivision and, therefore, upon subdivision part of the cost price of the
32

subdivided lots:
1.

the cost of infrastructure land (i.e. that part of the broad acres land on which services and
utilities were to be build and transferred to the Council);

2.

the costs of infrastructure works (e.g. the cost of establishing services and utilities
infrastructure land); and

3.

the external costs (e.g. the costs of headworks including the provision of services and
utilities

34

33

on the

to the land, but on land not owned by the taxpayer).

It is unclear whether reinstatement costs may be used to reduce the market selling value of broad
35

acres. The cost of, for example, reinstating excavation works and rectifying site contamination may
markedly reduce the market value of land (at least for a period).
From year to year, the taxpayer may determine to value each article of trading stock at cost, market
36
selling value or replacement price. Replacement price is generally not an appropriate method of

Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 & Casimaty v FCT 97 ATC 5135; (1997) 37 ATR 358; cf Stevenson v FCT 91 ATC 4476;
(1991) 22 ATR 56.
27 FCT v Whitfords Beach P/L [1982] HCA 8 (magnitude of development does not convert it into a business); cf Stevenson v FCT 91 ATC 4476; (1991) 22
ATR 56 (magnitude of development is highly persuasive).
28 Stevenson v FCT 91 ATC 4476; (1991) 22 ATR 56 (extensive services and utilities provided); cf Casimaty v FCT 97 ATC 5135; (1997) 37 ATR 358
(minimal works to obtain council approval).
29 e.g. Philip Morris Ltd v FCT 79 ATC 4352; (1979) 10 ATR 44 (regarding costing generally and not specifically land).
30 Rulings IT 2350 & IT 2402.
31 Determination TD 92/132.
32 FCT v Kurts Development Ltd 98 ATC 4877; (1998) 39 ATR 493.
33 e.g. internal access roads, internal street lighting, internal sewage and drainage and parklands.
34 e.g. external road works to the broad acres, downstream sewage and drainage to the broad acres and external parklands and contributions to civil
services such as school improvements and expansions.
35 Refer to Case A42 69 ATC 235 where new Council requirements on developing land arguably reduced the lands market value. The taxpayer was
unsuccessful because the change occurred after the close of the income year the subject of the assessment.
36 Sec. 70-45 ITAA 1997.
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valuing land that is trading stock.

37

For an appreciating article of trading stock such as land where

there will be an increase in value between the start of an income year and the end of the income year,
the change from:
1.

cost to market selling value, will likely derive assessable income; and

2.

market selling value to cost, will likely incur a general deduction.

It may be possible to recognise a general deduction for the loss in value in a particular year (e.g. by
reinstatement costs) by changing from cost to the market selling value method. The change back
from market selling value to cost will reverse this general deduction and derive assessable income.
Although relatively short term, this may create a cash flow benefit in the appropriate circumstances.

2.3 Profit making schemes

The ordinary income of a business operation or commercial transaction includes the profit on certain
isolated transactions entered into with the purpose of making a profit.
Westfield Ltd v FCT

39

38

emphasised the distinction between a transaction occurring as part of

business operations (Business Limb) and as part of a commercial transaction outside the ordinary
business operations (Commercial Limb).
Arguably, the main difference between the Business Limb and Commercial Limb is that:
1.

it will automatically be inferred at all times that the taxpayer had a profit-making intent under the
Business Limb; but

2.

it will need to be positively establish at the time of entering into the transaction that the taxpayer
intended to make a profit in relation to the particular transaction by which the profit was in fact
made and not simply in a temporal sense under the Commercial Limb.

40

The Commissioner considers that the sale of property will be a profit making scheme under both limbs
if the taxpayer had a profit making intent at the time the sale transaction is entered into and it need
not be established that the profit arose in the manner initially intended.

41

The Commissioners position would significantly expand the operation of the profit making scheme
regime.
The Commissioner considers the following factors to determine whether an isolated transaction
constitutes a profit making scheme:
1.
2.

the nature of the entity undertaking the operation or transaction;

the nature and scale of other activities undertaken by the taxpayer;

3.

the amount of money involved in the operation or transaction and the magnitude of the profit
sought or obtained;

e.g. Parfew Nominees P/L v FCT 86 ATC 4673 (1986) 17 ATR 1017.
FCT v Myer Emporium Ltd [1987] HCA 18; Westfield Ltd v FCT 91 ATC 4234; (1991) 21 ATR 1398; Ruling TR 92/3.
39 Westfield Ltd v FCT 91 ATC 4234; (1991) 21 ATR 1398.
40 FCT v Myer Emporium Ltd [1987] HCA 18; Westfield Ltd v FCT 91 ATC 4234; (1991) 21 ATR 1398; & FCT v Hyteco Hiring P/L 92 ATC 4694; (1992) 24
ATR 218.
41 Ruling TR 92/3.
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4.

the nature, scale and complexity of the operation or transaction;

5.
6.

the manner in which the operation or transaction was entered into or carried out;
the nature of any connection between the relevant taxpayer and any other party to the

7.

operation or transaction;
if the transaction involves the acquisition and disposal of property, the nature of that property;

8.

and
the timing of the transaction or the various steps in the transaction.

Profit is calculated according to profit and loss accounting methodology and not receipts and
outgoings tax accounting. The profit calculation assumes the profit arises from one transaction and
not from a continuing business. The methodology of calculating the profit has not received much
42

judicial comment. The profit is the difference between the price realised on disposal, less the costs
43
of acquisition and the costs of selling.
44

45

It is unclear whether historical cost or market value at the time the property becomes subject to a
profit making scheme is used. The historical cost basis would significantly increase the profit on the
transaction and might lead to double taxation.
46

The concept of cost is arguably includes a wider variety of costs in the profit calculation. The fact
that a cost has not yet been paid or a liability is contingent at the time of calculating the profit does not
47

preclude such costs being subtracted from the profit. The calculation may therefore result in costs
not otherwise allowable as a cost of trading stock being subtracted/deducted under the profit making
scheme regime
Where land is sold, the costs applicable to the development must be apportioned to each parcel of
48
land sold. This is done under the method of tax accounting. The calculation method will need
modification if the project is restructured before development is completed. These issues are
variously discussed in the following Taxation Determinations (which in several respects can be
criticized):
1.

TD 92/126 Income tax: property development: if in an isolated commercial transaction land is

acquired for the purpose of development, subdivision and sale, but the development and
subdivision do not proceed, how is a profit on a sale of the land treated for income tax
purposes?

2.

TD 92/127 Income tax: property development: if land is acquired for development, subdivision
and sale but the development is abandoned and the land sold in a partly developed state, how
is a profit on a sale of the land treated for income tax purposes?

3.

TD 92/128 Income tax: property development: if land is acquired for development, subdivision
and sale, but after some initial development the project ceases and is recommenced in a later
income year, how is a profit on a sale of the land treated for income tax purposes?

FCT v Whitfords Beach P/L [1982] HCA 8 (the decision when remitted to the Federal Court to determine the profit of the transaction).
FCT v McClelland (1969) 118 CLR 353, 358.
44 FCT v Myer Emporium Ltd [1987] HCA 18.
45 FCT v Whitfords Beach P/L [1982] HCA 8.
46 FCT v Whitfords Beach P/L [1982] HCA 8; R. Parsons, Income Taxation in Australia, Law Book Company Ltd, 1985, para 12.40
47 R. Parsons, Income Taxation in Australia, Law Book Company Ltd, 1985, para 12.42 & 12.43.
48 FCT v Thorogood (1927) 40 CLR 454
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2.4 Capital gains tax

A capital gain or loss may arise upon the occurrence of a CGT event (e.g. a transfer)

49

in respect of a

50

CGT asset (e.g. land), unless an exemption applies, rollover relief defers the capital gain or a
provision denies the loss.
A capital gain arises where the proceeds from the CGT event exceed the adjusted acquisition costs of
51

the CGT asset. A capital loss arises where the proceeds from the CGT event are less than the
52
adjusted acquisition costs of the CGT event.
Capital gains on assets acquired before 20 September 1985 are disregarded.
A net capital gain is included in the assessable income of the taxpayer.

53

54

An individual or trust that has held a CGT asset for at least 12 months may reduce the capital gain by
50% and a superannuation fund may reduce the capital gain by 33% under the CGT general
discount.

55

56

A number of exemptions (e.g. the main residence exemption ) and concessions (e.g.
57

small business concessions ) may also apply in particular circumstances.

Acquiring and retaining land as a capital asset to access these discounts, exemptions and
concessions is central to tax planning property projects.
The cost base of acquiring an assets consists of 5 elements:
1.

The 1st element of cost base represents amounts of money or property paid or given, or

2.

required to be paid or given, to acquire the asset.

The 2nd element of cost base includes incidental costs of acquisition (e.g. advice costs,
transfer costs, stamp duty, advertising costs and valuation fees).

3.

The 3rd element of cost base includes non-capital costs of ownership (e.g. interest not
otherwise deductible, repairs and insurance costs and rates and land tax).

4.
5.

The 4th element of cost base includes capital expenditure increasing the asset's value.
The 5th element of cost base includes capital expenditure to preserve title.

Some project expenses may not be included in the cost base. For example, it is unclear whether the
st
58
th
1 element of cost base includes remote third party tender payments and whether the 4 element of
cost base include compensation payments to obtain Council approvals.

Sec. 104-10 ITAA 1997 - Disposal of a CGT Asset: CGT event A1.
Sec. 108-5 ITAA 1997.
51 Sec. 102-5 ITAA 1997.
52 Sec. 102-10 ITAA 1997.
53 Sec. 104-10(5) ITAA 1997 - Disposal of a CGT Asset: CGT event A1; Determination TD 7.
54 Sec. 102-5 ITAA 1997.
55 Sec. 115-25 ITAA 1997; Determination TD 2002/10.
56 Div. 118-B ITAA 1997.
57 Div. 152 ITAA 1997.
58 The provision would appear to be sufficiently widely worded.
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2.5 Differences in expense treatment

It is unclear whether development costs such as:
1.

informal compensation payments to residents objecting to the development;

2.
3.

the notional value of personal services in managing the development;

59
60
opportunity payments,
tender administration payments
and transferable floor area
payments

61

will be a cost of trading stock, subtracted in calculating profit under the profit making scheme regime
or an element of cost base under the CGT regime or whether such costs will be wasted (i.e. black
hole expenditure).
The entitlement to these expenses can be inconsistent across the regimes, so tax planning may
require structuring so a particular regime applies which will include the particular expenses.

2.6 Mere realisation

Where the trading stock, profit making scheme or capital gains tax regimes do not apply (e.g. preCGT assets), the proceeds of the project are not taxed.
Post-CGT buildings and intangible improvements to pre-CGT Assets are separate post-CGT Assets.
These improvements are subject to the CGT regime, requiring capital proceeds to be apportioned.
A post-CGT building or structure is a separate asset to the pre-CGT land.

62

Accordingly, the building

component of a property development on pre-CGT land, is taxable. The Commissioner considers that
the increase in land value attributable to Council approval for rezoning and development will be a
separate post- CGT Asset and separately taxable under the CGT regime.

63

Tax planning to retain the pre-CGT status of land usually involves appointing a separate development
entity to undertake any development so that the landowner remains very passive so that the property
project does not become a profit making scheme.

A payment to a person to assume that persons right to tender for land in a restricted tender arrangement.
A payment to a tender offeror to permit the taxpayer to tender or to defray administration costs of the offeror in considering the tender.
61 The ability for the owner of a conservation site to transfer developer floor area to another site to increase the maximum permissible floor area for
development purposes of the other site; see the Naval Military & Airforce Club of South Australia Case (1994) 28 ATR 161.
62 Section 108-55(2) of the 1997 Act.
63 CGT Determination No. 5; sec. 108-70(2) ITAA 1997.
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3 Introduction to structuring
3.1 Tax planning
Tax planning is the professional art of balancing different legal and tax entities relative tax and nontax characteristics including:

64

1.

tax treatments (degree of transparency, working capital

splitting/streaming, entitlement to CGT discounts and concessions);

retention,

distribution

2.

progressive marginal and corporate tax rates;

3.
4.

investment flexibility (capitalisation and financing);

asset protection robustness (personal, corporate and intra-entity insolvency);

5.
6.

business succession flexibility (third party or intergenerational transmissions);

governance regulation (degree of contractual, statutory and governmental and professional

7.

supervision); and
administrative and compliance complexity and cost.

Legitimate tax planning uses tax policy distinctions/disconformities to reduce the overall effective tax
rate.
Tax planning opportunities are dictated principally by whether the landowner intends to sell the
subdivided land to produce a profit or retain the land for income producing purposes (e.g. to use in a
business or for leasing). This will determine whether the profit is potentially taxable on revenue
account (e.g. as ordinary income) or on capital account (e.g. as a taxable capital gain) respectively.
Choosing the correct business structure is an art rather than a scientific application of principles. The
choice of structure will vary depending upon (amongst other matters) the insolvency protection,
liquidity and financing requirements and priorities of each participant.
There is a significant benefit of classifying a transaction on capital account on the odd occasion where
the mere realisation principle will apply. Also, there is arguably a bias towards classifying a
transaction on capital account where the taxpayer has carried forward capital losses or there is the
opportunity to use the CGT general discount

65

or the small business concessions.

66

This paper does not discuss the State taxes consequences of structuring including stamp duty and
land tax.

B. Freudenberg, Tax on my mind: Advisors recommendations for choice of business form, (2013) AT Rev 33.
Div. 115 ITAA 1997.
66 Div. 152 ITAA 1997.
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3.2 Landowner entities

Selecting the landowner structure for a property project is not always possible.

67

A comparison of some of the relevant attributes of the above structures are summarised below:
Individual

Partnship

Family
Trust

Unit Trust

Company

Joint
Venture

Low

Medium

Medium

Medium

High

High

Partnership
Acts

Trustee Acts

Trustee Acts

Corporations
Act

Insolvency risk to participants

High

High

Low

Low

Low

Medium

Family dispute risk to

participants

High

High

Low

High

High

High

Access to development losses

Yes

Yes

No68

No

No

Yes

Access to negative gearing at

participant level

Yes

Yes

No

Yes69

Yes70

Yes

Access to 50% CGT Discount

Yes

Yes

Yes

Yes

No

Yes

Access to equity

Yes

Yes71

Yes

possible
CGT Event
E4

Dividend
Division 7A

Yes

Distribution flexibility

Low

Low

High

Low

Low

Low

Administrative complexity
External regulation

A company provides a high degree of insolvency protection and has a well-defined corporate
governance process, which is ideal for unrelated business parties. A company may be suitable for a
trading stock or profit making scheme project landowner. However, legislative restrictions on dividend
72

73

74

policies; the inability to distribute current year losses, and ineligibility for the CGT discount;
means that a company is not the most appropriate tax structure for a capital gains project landholder.

A trust (particularly a discretionary trust or a hybrid unit trust) provides a high degree of flexibility in
profit distribution policy. Again, the inability to distribute current year losses and restrictions on
transferring losses without making a family trust election

75

means that a trust is not the most

appropriate structure for landownership between unrelated parties. Negative gearing discretionary
76
and hybrid trusts is also problematic.

e.g. the land was acquired under a will or by a particular entity for commercial and other reasons without regard to the taxation and commercial issues for
future development.
68 The trust loss rules in Schedule 2F of the 1936 Act may permit injection activities in limited circumstances.
69 If borrowed at participant level and used to capitalise the unit trust.
70 If borrowed at participant level and used to capitalise the company.
71 FCT v Roberts & Smith 92 ATC 4380; (1992) 23 ATR 494; Ruling TR 95/25.
72 Div. 7A ITAA 1936 (deemed dividends); sec. 109 ITAA 1936 (excessive remuneration); Div. 202 - 207 ITAA 1997 (imputation credits); sec. 160APHC160APHU ITAA 1936 (45-day holding period rules); Division 197 ITAA 1997 (share tainting rules)
73 Div. 36 ITAA 1936 (prior year losses); Div. 165 ITAA 1997 (current year losses and bad debt deductions); Div. 175 (current year deductions); Div. 170
ITAA 1997 (intercompany loss transfers)
74 Sec. 115-10 ITAA 1997.
75 Sch. 2F ITAA 1936.
76 Income Tax Ruling IT 2385 & ATOID 2003/546.
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A partnership permits the distribution of current year losses and has a reasonably well-defined
governance process. However, the agency and fiduciary relationships of the partners and the joint
and several liabilities of the partners generally outweigh the advantage of using current year losses,
making a partnership an unattractive structure.
An unincorporated joint venture or a non-entity joint venture provides separate taxation treatment of
77
landowners.
The Commissioner limits a joint venture operation to circumstances where the
78
participants are compensated by a share of the output rather than joint or collective profits.
An
improperly established joint venture structure may not achieve the desired business,
taxation

81

requirements, because it is in fact a general law partnership

82

79

financing

80

and

83

or a taxation partnership .

Various forms of unincorporated joint ventures of companies and trusts are frequently used to achieve
a satisfactory mix of the above requirements.

3.3 Restructuring
Care needs to be exercised when the structuring of a property development is intended to be on
capital account, because changes to the taxpayer structure (e.g. a change of shareholding or a
change of purposes in a Constitution) may transform a capital account development into a property
development business. The admission of new equity parties to fund the property development may
be the catalyst that transforms a capital account development into a property development business.
84
Such changes were considered critical in FCT v Whitfords Beach Co P/L where beach front land
held in a company and used as a right of way to fishing shacks on the beach was acquired and
restructured to permit subdivision and development.

85

The practice of establishing separate development entities to argue that each entity does not have a
history of property development may be of little effect. The members extensive history of property
86
development was a significant factor in FCT v Whitfords Beach Co P/L in concluding that the
87

company was carrying on a property development business.

This reasoning suggests that the
Courts may look beyond the separate legal entity to the history of members and possibly other key
associates such as directors and managers.

88

3.4 Development entity

Ruling GSTR 2004/2.

Ruling GSTR 2004/2.
79 The Laws of Australia, The Law Book Company Limited, Part 4.8, Chapter 4.
80 The Laws of Australia, The Law Book Company Limited, Part 4.8, Chapter 4.
81 Discussed in M. Walsh, Partnerships joint ventures and taxation (1978-79) 13 Taxation in Australia, 478; G. Ryan, Joint venture agreements, (1982) 4
AMPLJ, 101; H. Speath, Joint ventures & GST, (2001) 4(3) Tax Specialist, 162.
82 A general law partnership is defined as the relationship that subsists between persons carrying on a business in common with a view to profit (Section
5(1) of the Partnership Act).
83 A partnership for tax purposes includes a general law partnership and an association of persons in receipt of income jointly (Section 995-1 of the 1997
Act). For the purpose of this paper, general law partnership will refer to a partnership satisfying the Partnership Acts, a taxation partnership will be used
to refer to persons in receipt of income jointly and partnership will refer to both types.
84 FCT v Whitfords Beach P/L [1982] HCA 8.
85 FCT v Whitfords Beach P/L [1982] HCA 8, Gibbs CJ; Wilson J; cf Mason J.
86 FCT v Whitfords Beach P/L [1982] HCA 8.
87 FCT v Whitfords Beach P/L [1982] HCA 8 Gibbs CJ; Mason J cf Wilson J.
88 compare Determination TD 92/124 where the Commissioner takes a broad view of when land will be trading stock.
77
78

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Since the indicia of carrying on a property development business includes the extent of involvement of
the landowner, the appointment of a development entity to manage the development and contract
with service providers may permit the landowners to remain very passive to assist in establishing that
the landowner is not carrying on a business.

The developer entity can be a company or trust. Depending on how the development contract is
structured, derivation of income and incurring of expenses can be managed so avoid liquidity
problems.

3.5 Builder entity

The Proposed Structure
The obligation to incur and carry building costs may be transferred by the building contract to Builder
P/L.
A turn-key or modified turn-key building contract may require Builder P/L to incur and carry
development costs and to render an account only upon achieving a milestone (e.g. at lock up or
practical completion stages) or upon sale of the development (respectively).
Builder P/L deducts all these outgoings on a current year basis and returns income in the later years
when the milestones are met or the development is sold (as applicable). The landowner only brings
into account the increase in value of the land resulting from the building at the later years when the
milestones are met or the development is sold. As a group, the group has effectively accelerated the
deduction for the building costs.

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Tax Effect for the Builder

Builder P/L will derive income when entitled to bill for the work (being the time Builder P/L has a
89

present and non-contingent right to receive payment). This will be when Builder P/L achieves the
milestone or the development is sold (as applicable). The Commissioner appears to have accepted
this proposition in respect of arms length contracts.

90

The Commissioner requires Builder P/L to apply normal accounting methods.

91

The basic method and estimated profit basis are alternate accounting methods available to Builder
P/L to return income in respect of a long term construction contract. A long-term construction
92
contract is a building contract that extends over two income years.
The basic method returns
income (e.g. all progress and final payments) derived in an income year less all outgoing deductions
93
incurred in carrying on the building business in an income year. The estimated profit basis returns
the ultimate profit or loss over the duration of the contract on a reasonable basis in accordance with
accepted accounting standards.
The Commissioner has attempted unsuccessfully to require Builder P/L to use the estimated profit
basis where derivation of income for Builder P/L is deferred under the building contract.

94

Tax Effect for the Landowner

The landowner is obliged to include in the cost of trading stock expenditure incurred in the course of
the landowners material purchasing and manufacturing activities to bring the article to the state in
which it became trading stock held. The building expenditure under the turn-key and modified turnkey building contracts are not incurred until Builder P/L achieves the milestone or the development is
sold. This is because the landowner does not have a non-contingent liability to pay those amounts
until that time. Accordingly, the landowner does not have an obligation to increase the cost value of
trading stock by the value of the building improvements.

Henderson v FCT 70 ATC 4016; (1970) 1 ATR 596; Barratt v FCT 92 ATC 42745; (1992) 23 ATR 339.
Determination TD 94/39.
91 Ruling IT 2450.
92 Ruling IT 2450.
93 This represents the simple application of the statutory provisions; Grollo Nominees P/L v FCT 97 ATC 4585; (1997) 36 ATR 424.
94 Grollo Nominees P/L v FCT 97 ATC 4585; (1997) 36 ATR 424.
89
90

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Reduced Building Margin

There is no requirement for a captive builder to charge a captive landowner full margins on services.
Where the landowners development is on capital account Builder P/L might forgo the builders margin,
which would otherwise be taxable to Builder P/L as ordinary income. As the value of the building vest
in the landowner, Builder P/Ls notional profit may be shifted to the landowner and converted to
capital.

95

This value shift may have value shifting consequences where Builder P/L is incorporated.

96

Part IVA
The general anti-avoidance provisions in Part IVA ITAA 1936 need to be carefully considered.

95
96

Grollo Nominees P/L v FCT 97 ATC 4585; (1997) 36 ATR 424

Div. 727 ITAA 1997.

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4 Practical Examples
4.1 Main residence projects
The purpose of this example is to demonstrate the technical considerations that must be considered
in selling a 2 lot main residence subdivision.
Jack purchased 2 hectares (5 acres) in July 1997 on the outskirts of St Helens township. Jack completed
building a main residence on the property by December 2008. The property has tripled in value. Jack
wants to subdivide into 2 x 2.5 acres blocks, to retain one block as a main residence and to sell the other
block.

The property was acquired to be used as a main residence and is on capital account. The property is
97
within the 2 hectare main residence limitation.
The main residence exemption will apply to the block and subsequent dwelling from date of
acquisition, if the dwelling is built within 4 years from the date the land was acquired. The main
residence must be moved into as soon as practicable after the work is finished and cannot be sold
98
within 3 months of completion.
The subdivision of the property is not a CGT event and the cost base is apportioned between the new
99
split blocks. The Commissioner will accept an apportionment between the new split blocks on an
area basis or a relative market value basis.

100

The main residence exemption attaches to the land with the dwelling. Accordingly, the main
101
residence exemption will not apply to the sale of the vacant land.
Therefore, to preserve the main
residence exemption, the current dwelling and land should be sold and the taxpayer should retain and
build upon the vacant land.

Sec. 118-120 ITAA 1997; Determination TD 1999/67.

Sec. 118-150 ITAA 1997.
99 Sec. 112-25 ITAA 1997; Determination TD 7.
100 Determination TD 97/3.
101 Sec. 118-165 ITAA 1997.
97
98

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The taxpayer can build on the vacant block, assume occupation of the new main residence and sell
102

the old main residence, provided the concurrent ownership periods do not exceed 6 months.
A
103
modified method of calculating the ownership period would then apply.
The taxpayers ownership
104

interest in the old main residence only ends at settlement of the sale.
Care is required to ensure
the 6 months period is not exceeded. Long settlement dates can, therefore, be hazardous.
Alternatively, the taxpayer can sell the old main residence and then build a new main residence on
the vacant land. The main residence exemption may be retained in the new main residence for up to
4 years from the date the land is acquired (not applicable in this example). Otherwise the 4 year
period applied for the period immediately before the land became the new main residence. The new
main residence must be moved into as soon as practicable after the work is finished and cannot be
sold within 3 months of completion.

105

The ownership period of the new main residence does not include the period of the old main
residence (if more than 4 years from the date of acquisition of the land). Accordingly, tax will be
payable on the subsequent disposal of the new main residence on a proportionate basis. The
alternate scenarios need to be compared for tax efficiency.
The subdivision and sale of a main residence is unlikely to be an enterprise for GST purposes.
107
subdivision and issue of new titles will, therefore, have no GST consequences.

106

The

4.2 Mixed investment and sale projects

The purpose of this example is to demonstrate the effect of mixed investment & development purpose
projects.
Jack acquired a property for the purpose of subdivision, building 1 shop, 3 terrace houses and
48 townhouses for lease. To repay the bank, it is estimated that the shop, terrace houses and
15 townhouses would be sold (i.e. 36% of the project). In fact only the shop, 3 terrace houses and
13 townhouses were sold (32% of the project).

Sec. 118-140 ITAA 1997.

Sec. 118-130 ITAA 1997; Determination TD 2000/13.
104 Gasparin v FCT 94 ATC 4280, 4288; (1994 ) 28 ATR 130.
105 Sec 118-150 ITAA 1997.
106 Determination GSTD 2000/8; Miscellaneous Taxation Ruling MT 2000/1, example 11.
107 Ruling GSTR 2003/3.
102
103

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ARM Construction P/L v FCT has stated that:

Property Development - Practical Income Tax, CGT and GST Issues

108

The decisive factor in determining whether or not the unitsbecame trading stock at any timewas the primary or substantial intent or purpose of the
parties, which intention or purpose was carried into execution. The fact that they may have had a secondary or subsidiary purpose in selling the units if that
became necessary in order to discharge their subsequent borrowingdid not stamp upon the units the character of trading stock
[So] far as the unsold town houses are concerned, the situation is the sameI am of the opinion that the town houses in fact retained as well as the 13
sold, could not be characterised a trading stock, a conclusion which extends to the shop and the terrace houses. But I consider that the profits arising on
the sale of theproperties in fact sold is assessable under the provisions of sec. 26(a). So far as the shop and the two terrace houses are concerned, I
find that it wa the intention of the appellants from the outset o sell them in order to assist funding the development, an intention which related with greater
certainty to the ship than to the terrace houses.

Accordingly, the properties intended to be sold and in fact sold would be a profit making scheme. The
balance would retain their capital status. Although the taxpayer thought he would have to sell an
additional 2 townhouses, that expectation does not appear to make those 2 townhouses part of the
profit making scheme.

4.3 Private property syndicate projects

The purpose of this example is to demonstrate that a unit trust property syndicate is generally tax
inefficient, unless a specially modified unit trust is used.
Jack and seven unrelated people acquired a property in a unit trust for the purpose of subdivision,
building a house on each block and distributing the block in specie (in kind) to each unitholder.

The mixed purpose of the participants creates a problem identifying the purpose of the project. To
reconcile the mixed purposes, the property should be subdivided and each block distributed in kind to
109
the relevant unit holder.
This will ensure the property is not trading stock and is not a profit making
scheme. This will permit the various unit holders to have different intentions.
The terms of the unit trust will also be vital. The unit holders of a traditional unit trust hold a tenants110
in-common interest in all of the property (not any identifiable part of the property).
After subdivision,
each unit holder owns a proportionate interest in each block. The partition and exchange of interests
so that each unit holder owns one block absolutely represents a proportionate disposal of an interest

ARM Construction P/L v FCT 87 ATC 4790, 4806; (1987) 19 ATR 337.
ARM Construction P/L v FCT 87 ATC 4790, 4806; (1987) 19 ATR 337.
110 CSR (Vic) v Karingal 2 Holdings P/L [2003] VSCA 214.
108
109

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in all other blocks.

consequences.

The disposal of the various interests will, therefore, have income tax

111

If a special purpose unit trust is used where each unit in the trust grants a beneficial interest in the
particular block of land, then the unitholder will have an absolute entitlement to the land and there is
112
no partition and exchange.
The unit holder exemption exempts an in-kind transfer of land by the principal unit trust to a unit
holder who was a unit holder at the time the land was acquired.
In respect of the exemption:
1.

only unit holders at the time the land was acquired can obtain an exempt transfer and other unit
holders are subject to duty;

2.

the exemption is only applicable in the same proportion as the unit holders proportionate unit
holding; and

3.

the value of the unit holder in the unit trust must decrease by a redemption of unit or by the
overall value.

The transfer must be a transfer in the capacity of beneficiary and not on sale. There must not be any
collateral consideration.
The beneficiary must receive the property in its capacity that it owned the units. Where the unit holder
was a company there must be no change in ownership control or as a trustee there must be no
change in the relevant beneficiary from the date the land was acquired by the principal unit trust.
The unit trust is treated as a separate entity for GST purposes.
of property will have GST consequences.

113

Accordingly, the in kind distribution

114

4.4 Partition and exchange and in-specie distribution projects

The purpose of this example is to demonstrate how a partition and exchange occurs.
Jack and Jill inherited a property at tenants-in-common. Jack and Jill wish to subdivide the land so each
owns their own block.

Determination TD 92/148.
Sec. 116-30 ITAA 1997; cf TR 2004/D25; CSR (Vic) v Victoria Gardens Developments P/L [2000] VSCA 233.
113 Sec 23-5 & 184-1 GSTA 1999.
114 By analogy with partnerships see Rulings GSTR 2003/13 & GSTR 2003/D5.
111
112

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A partition of land occurs when W and B as co-owners of both white acre and black acre exchange
115
their interests so that W solely owns white acre and B solely owns black acre.
116

In Maybelina Investments P/L v CSR (Vic), M, A and I acquired property as co-owners to develop
and partition 6 lots. Prior to partition 2 lots were sold to third parties. The partition of the balance land
was effected by sale contracts for a specified monetary amount. The SRO argued that since the
transaction was effected as a sale, it was not a partition and it was subject to transfer duty. Further,
since some land was removed from the pool of land, a partition could not occur in respect of any of the
property because there was not a community of ownership of the original acquired property.
VCAT held that a partition occurred in respect of the land interests exchanged despite being effected
by a sale. However, no partition occurred in respect of the lots sold to third parties accordingly, duty
was payable on the value of that land.
Ruling DA.017 provides the following worked example:
Example
X and Y own land in Victoria valued at $100,000 with a respective 30% and 70% interests in the land. The land is partitioned under an agreement such that
after the partition, each has an interest of $50,000 in the land.
No duty would be charged on the transfer of Y's interest in the land because the value of Ys interest in the land prior to the partition (ie $70,000) exceeds
the value after the partition (ie $50,000). Duty would be charged on the transfer of X's interest in the land because the value after the partition (ie $50,000) is
greater than that before the partition (ie $30,000). Duty would therefore be charged on the transfer of the interest in land to X and calculated on a value of
$20,000.

Provided each block is of equivalent value to the value of the tenants-in-common interest, no duty
should be paid.

4.5 GST residential development classifications

This example discusses the differences between different types of residential premises for GST
purposes.
Jack owned a terrace and significantly renovated the interior, including moving walls, altering the
location of the bathroom, refurbishing the kitchen and building a second story on the rear of the terrace.
Jack used the terrace as a dental surgery. Jack listed the property for sale and the purchaser wanted to
use the property as medical treatment rooms.

115
116

Sec. 27 DAV 2000; CSR (Vic) v Christian [1991] 2 VR 129.

Maybelina Investments P/L v CSR (Vic) [2004] VCAT 549.

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10% GST is levied on the value (or deemed value) of taxable supplies of goods, services, rights and
things connected with Australia made in the course or furtherance of an enterprise that is registered or
117
required to be registered but does not include GST-free, financial or input taxed supplies.
Such an enterprise is entitled to an input tax credit or reduced input tax credit in respect of creditable
acquisitions of goods, services, rights and things obtained in the course or furtherance of the
118
enterprise that are not referable to GST-free, financial or input taxed supplies.
The supply of new residential premises is a taxable supply. The supply of residential premises is an
119
input taxed supply. The supply of commercial residential premises is a taxable supply.
Residential premises means land or a building that is occupied or is intended to be occupied and is
capable of being occupied as a residence or for residential accommodation (regardless of the term of
120
the occupation or intended occupation).
121

The character of the premises is determined by the physical characteristics of the premises test
122
without reference to the suppliers use of the premises
or the recipients intend use of the
123
premises.
Jacks terrace demonstrates all the objective characteristics of residential premises. Jacks use of the
premises and the recipients intended use of the premises is irrelevant and does not convert the
premises into commercial premises.
The premises will be new residential premises where the premises are substantially renovated.

124

The Commissioner considers substantial renovation includes:

1.

the renovation needs to affect the building as a whole and result in the removal or replacement
125
of all or substantially all of the building;

2.

substantial renovations can be the structural or non-structural components of the building;

3.

the removal and replacement of a kitchen and bathroom will not of itself be substantial
127
renovation;

4.

the additional story to the building was not substantial renovations;

126

128

Reasonable practitioners can differ on what constitutes substantial renovation and whether substantial
renovations has occurred to Jacks terrace.
Reasonable practitioners can differ on whether the sale is the input taxed supply of residential
premises or the taxable supply of new residential premises.

4.6 GST going concern project disposals

Sec. 9-5 GSTA 1999.

Sec. 11-20 GSTA 1999.
119 Sec. 40-65 GSTA 1999
120 Section 195-5 GSTA 1999.
121 Sunchen P/L v FCT [2010] FCAFC 138
122 Ruling GSTR 2000/20 at [19] and [22] does not apply.
123 Toyama P/L v Landmark Building Developments P/L 2006 ATC 4160; Decision Impact Statement (4541/02).
124 Sec. 40-75 GSTA 1999; GSTR 2003/3.
125 GSTR 2003/3 at [61].
126 GSTR 2003/3 at [69].
127 GSTR 2003/3 at [76].
128 GSTA TPP 068.
117
118

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This example discusses whether the supply of an incomplete property development can constitute a
GST free supply of a going concern.
Jack owned 50 hectares of land and carried on a property development business of subdividing the land
into residential blocks over 3 stages. At the end of stage 1, Jack sells the land to a new developer and
agrees to continue construction of stages 2 and 3. Up until settlement Jack continued to the
development in accordance with the development timetable.

The supply of a going concern is GST-free if for consideration, the recipient is GST registered or
required to be GST registered, all things necessary for the continued operation of the enterprise are
supplied and the supplier and recipient agree in writing that the supply is of a going concern.
In Aurora Developments P/L v FCT

130

129

the supply was not a going concern because the supplier had

abandoned the development activities before settlement. Theoretically it should be possible to

continue the development activities up until the date of settlement. There are some practical
difficulties in how to contractually manage this - e.g. adjustments for the materials and expenses up
until settlement since it is not defrayed from trading income.
Any hiatus between the completion of stage 1 and the continuation of work on stage 2 by Jack may
result in the property development enterprise not being carried on up to the date of the supply.
This paper was previously presented to the Tax Institute on 29 October 2015.
29 October 2015
Ron Jorgensen
Partner
Rigby Cooke Lawyers
Chartered Tax Adviser
Accredited Specialist in Tax Law
T

03 9321 7824

0414 967 411

03 9321 7900

Level 11, 360 Elizabeth Street, Melbourne, Victoria, 3000

rjorgensen@rigbycooke.com.au

www.rigbycooke.com.au

www.taxlore.biz

@TaxLore

129
130

Sec. 38-325 GSTA 1999.

Aurora Developments P/L v FCT [2011] FCA 232.

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5 Glossary
DAV 2000

Duties Act 2000 (Vic) (DAV 2000)

GSTA 1999

A New Tax System (Goods and Services Tax) Act 1999

ITAA 1936

Income Tax Assessment Act 1936 (Cth)

ITAA 1997

Income Tax Assessment Act 1997 (Cth)

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