Property developers, whether large or small, need to carefully consider the legal and tax consequences of the structure in which they undertake their developments. It is imperative in the due diligence process that expert advice be attained to ensure reduced costs particularly those associated with Stamp Duty, GST and Capital Gains Tax.

What is a Joint Venture?

A Joint Venture is an agreement between 2 or more people/entities (ie. Companies/ Trusts) to undertake a venture, business operation or commercial activity together - primarily for the purpose of profit. It differs from a standard partnership as the two parties do not have to equally share in start up costs, expenses, liabilities or profits. This allows for more flexibility to the standard 50/50 relationship provided by partnership structures.

Why use a Joint Venture Structure when Developing?

The key advantages of using a Joint Venture structure for Property Development activities include the following:

1. Each party pays tax on their portion of overall development profit in there own  respective entities, not at a joint level (allowing for move flexibility to each party)
2. Each party of the Joint Venture can have separate Property Development liabilities provided these are agreed upon at commencement
3. Stamp Duty is often avoidable when developers wish to retain properties for their own portfolios 
4. Both the Capital Gains Tax 50% discount and Small Business Concessions are commonly available to Joint Venture entities on the sale of Developments
5. There is potential for significant GST savings by utilising a Joint Venture structure

Below is an example which highlights in practical terms the advantages of a Joint Venture structure.

Example:

John is a seasoned developer and formed his building company several years ago. He wishes to develop a block of land by subdividing the block into 4 titles and building 4 separate houses on each of the blocks. John wants to keep 2 of the houses and sell the remaining 2 to the general public.

John contacts his accountants at GMD to discuss which of his existing structures he should purchase the land in. After providing John with a list of the possible advantages and disadvantages of each structure, John decides to undertake a Joint Venture between a new Discretionary Trust and his existing Building Company. A Joint Venture Agreement is draw up by John's solicitor that states the Trust will provide the land, and the Building company will undertake the development and sell the completed properties.

On completion of the 4 homes John successfully sells 2 homes to the general public. He then winds down the Joint Venture as per the Joint Venture Agreement and keeps the remaining 2 properties in the new Trust that he set up for the venture. John does not pay stamp duty when the Joint Venture is wound down because the new Trust was the entity used to purchase the land. 

Two years later John decides to both of his remaining homes and receives the 50% Capital Gains Tax Discount. 

Should you wish to explore the advantages of Joint Venture structures more thoroughly or have any questions on the above scenario contact your GMD team member.