In this article Property Development Manager consultant and Registered Architect, Dan Everett from EVERETT Property Development Management chats with Michael Kerwin, property development expert and Director at Hoffman Kelly Chartered Accountants, and Elena Lenda, Property Development Client Manager at Hoffman Kelly Chartered Accountants to find out what accounting structures are available for property developers and how Accountants can assist with Feasibility Studies.

CHANGE OF ACCOUNTING OVER THE YEARS

Accounting for property developments has always been one of the more specialised and complicated areas of accounting, with the various layers of tax and unique complexities of the industry. This was amplified with the introduction of GST in 2000, and it feels we’ve been in a constant state of change ever since.

Australian Tax Laws are complex and constantly changing, with state based taxes also being a critical consideration in assessing a project or transactions feasibility. More than merely engaging an accountant to prepare a tax return and set of financial statements at the end of a project, developers and their advisers need to assess in advance the various tax issues hiding within a project and how and when they should be addressed.

THINKING ABOUT BUYING A DEVELOPMENT SITE?

There are numerous accounting and tax aspects to consider which will affect the development and its viability. These aspects must be considered early, and ideally, many discussed with your accountant before you even put pen to paper on a contract.

ACCOUNTANTS AND FEASIBILITY STUDIES

Some of the key considerations the expert property development team at Hoffman Kelly assess with clients at the front end of a project include:

  • Revenue versus Capital distinction (profits taxed as income, or under capital gains tax);
  • GST, including:
    • GST withholding requirements to consider upon both purchase & sale (depending upon circumstances);
    • Eligibility and application of GST margin scheme if applicable;
    • GST free going concern or farmland if applicable;
    • Assessing status of site (existing residential property/new residential property/non-residential property/vacant land);
  • Asset protection (between projects; projects v personal assets; funding considerations);
  • Vacant residential land tax. “Land banking” can now come with a hidden cost;
  • Capital Gain Tax withholding. Are you a foreign entity selling or are you acquiring from a foreign entity;
  • Periodic reporting on your subcontractors to the ATO. Do you know who your subbies are? ATO needs to know this too.
  • New Depreciation rules on plant and equipment. Be careful renting for too long prior to sale – your now “used” stock may not be as attractive to investors.
  • Land tax rules which are quite different state by state and keep changing!
  • Stamp Duty considerations:
    • Changes state by state;
    • Foreign acquirer duties;
  • Forever changing corporate tax rates;
  • Stream of announcements, proposed changes, discussions – e.g. Labour’s policies on negative gearing.

Hoffman Kelly’s expert team can assist you with all of the above and help you to make the right decision on the property with expert technical knowledge and ability to cut through complexities to arrive at commercial outcomes.

Michael Kerwin – 07 3394 2311

DEVELOPERS FEASIBILITY STUDY

Work with an independent team on the feasibility study of your project. With Brisbane’s trusted development and project management team at EVERETT Property Development Management, you can rely on their value for money approach to feasibility analysis, reviewing your project against the development cycle and including analysis of:

  • Highest and best use
  • Options and what-if scenarios
  • Market demand (e.g. townhouses or apartments or commercial)
  • Yield analysis (e.g. How many units or gross floor area)
  • Development timelines
  • Development briefs
  • Consultant scope of works

EVERETT Property Development Management’s team can assist you with the developers feasibility study and look after the day to day client side management of the development.

Dan Everett – 0406 705 567

WHAT DO EXPERT PROPERTY DEVELOPMENT ACCOUNTANTS DO FOR A DEVELOPMENT?

An expert property development accountant will be able to offer a wide range of assistance and guidance to developers on various matters. Hoffman Kelly understands the development business from the inside and have very strong technical skills to assist with the vast number of issues throughout the development cycle.

Some of the matters we help our clients with are:

  • Assist and review your feasibility numbers from an accounting perspective, including GST, Income taxes, Stamp duty and Land Tax calculations;
  • Advise on optimal structure to be used based on your unique circumstances;
  • Explore your finance options including analysis of equity and debt structuring with our expert partners;
  • Be a sounding board for any range of queries due to our extensive experience and broad range of expert contacts to assist with your needs;
  • Select an accounting software program;
  • Complete tax and GST registrations;
  • Preparation of Business Activity statements (BAS), including application of GST Margin Scheme;
  • Income Tax reporting.

 WHY PICK UP THE PHONE TO AN ACCOUNTANT PRIOR TO SIGNING A PURCHASE CONTRACT?

Choosing the right structure from the start is vital, as it sets the framework of your undertaking and will determine your state of protection, how the taxes you pay will be calculated, and in some instances improve or prohibit your ability to undertake your commercial desires.

You need an experienced adviser who knows the industry and is up to date with the most recent federal and state laws. If you choose the wrong structure and sign the contract, “fixing” this later could be a very costly exercise or perhaps not even feasible. We unfortunately see these incorrect acquiring structures and are often asked for advice on how best to deal with the situation and provide a solution.

In some of the extreme situations, we have seen clients loose very substantial amounts of money due to poor initial advice received in the first steps of the development, or failing to seek any advice until it is too late. Numerous tax and asset protection issues have to be considered prior to making a decision on the overall structure for the development.

We have a very  strong, proactive, and commercially savvy team that specialise in property development. We provide prompt responses to any property query of our clients’, regardless of how complex the transaction is.  Our directors and management team have an intimate understanding of property development industry allowing for this prompt response, so please do not take the risk of not seeking professional advice, pick up the phone and ask the question before signing any contract relating to any type of transaction.

TYPES OF ACCOUNTING STRUCTURES

There is no “one fits all” structuring formula for property development. Every property acquisition will need to be analysed and appropriately structured depending on the circumstances.

While there are broad varieties of types of structures and bespoke solutions depending on various circumstances, below are some of the options that we consider with property development structuring.

Note: This information is general in nature and will not take into account the very specific and unique circumstances of your particular development so the below is not advice and should not be considered in that way.

1. Single Owner Acquisitions

2. Discretionary Trust (Corporate Trustee)

3. Unit Trusts (corporate trustee)

4. Syndicate Acquisitions

This practice involves multiple parties investing their funds into a larger project. For example, five investors become a syndicate and acquire a large block of land for $10 million with the intention of progressing the property into a development, such as units or commercial shops for sale.

How can this be structured?

Company with trusts as shareholders

The company will suit for a large project or multiple ongoing projects.

For larger groups, holding company models can work well, depending on the specific circumstances of the group. If further information on this structuring option is of interest, get in touch with the Hoffman Kelly team.

5. Partnership of Trusts

This works well for a small number of partners.

6. Unit Trust (corporate trustee)

7. Joint venture and Project Management Agreements

JV’s or PM agreements are very common practices for related or unrelated parties combining their resources together to acquire properties or to undertake development on preowned land. These arrangements are often referred to `joint venture’ agreements’. Unfortunately there are many developers and land owners that have been misinformed in regards to the significance of a joint venture. In some cases, even advisers are failing to understand the very critical items around the GST, Income Tax and general liability in those arrangements.

If you are embarking on a “joint venture” it is highly recommended you speak with a property specialist to get all the facts and comprehensive advice to get it right for your specific needs.

CASE STUDIES

Case Study 1

JV Agreement

The below case study highlights the importance of having correctly drafted agreements:

Roger owned a large block of real state. Wang, the property Developer has approached Roger with a proposition to subdivide his large block of land, create house + land packages and sell.

Roger and Wang have entered into a “Joint Venture agreement” or at least what they thought was Joint Venture agreement. Once the project was completed and all the units were sold, the developer Wang has taken his profits and left overseas without remitting any taxes.

Subsequently, the Commissioner has issued assessments for the GST on the sale of the developed houses.  Since the ATO could not get a hold of Wang and upon inspection of the “JV” documents determined a partnership existed, they have made a claim against Roger. The liability sat with the partnership, but due to joint & severable liability, the ATO was able to pursue Roger only for the full debt.

Roger had already paid his 50% share of GST and relied on the “Joint Venture” agreement where each partner is only liable for their portion of GST payable.  The problem is that the JV agreement was drafted in a way that inadvertently created a partnership between Wang and Roger.

The partnership is in fact vastly different from the JV that Roger & Wang believed they were establishing; all partners are jointly and severally liable for 100% of the debts.

What could have been done differently?

  1. Both Roger and Wang should have approached a specialist accountant to make sure the specific terms of the draft agreement were in order and resulted in the desired commercial outcome in respect of taxes and commercial matters;
  2. If the JV agreement was drafted properly and reviewed by advisers, Roger would not be liable for Wang’s share of GST.

 Case Study 2 – Subdivision – House and Land Package

GST and Margin scheme 

Mark is acquiring a site and wants to understand the tax implications. The property in question is a block of residential land with an existing habitable house on it. Mark is intending to subdivide the block and create a new townhouse development for sale.

Property developer Kevin is the vendor and due to Kevin’s nature of business and activities, he is registered for GST. Kevin is willing to sell the land for $3,300,000. According to the executed contract, “ the purchase price is $3,300,000 including any GST” and as Kevin was intending to sell existing residential property there would be no GST payable out of his $3.3M in sale proceeds.

The contract was signed on 1st of August with 1st September settlement date. Kevin of course is intending to receive the full $3,3M to invest into his next project. Kevin had originally intended to develop this site, obtaining a DA, however decided not to proceed after receiving this strong offer.

Between the contract and settlement date Kevin decided to remove the house from the property, which Mark did not object to given he was going to demolish it anyway. Due to this, at time of settlement, the property was now no longer “residential land” but “vacant land”. What is the difference you may ask… The difference was $300,000 that needs to be paid to the ATO because vacant land attracts GST.

Kevin and his advisers did not fully understand the circumstances of removing the house, nor did they have appropriate clauses in the contract to protect against anything like this. Consequently, Kevin has only received $3,000,000 on sale of the land as he had to pay $300,000 to the ATO.

Unfortunately, the contract price was inclusive of GST, therefore was nothing that Kevin could do as the contract was already signed and Mark got HK advice to proceed as is.  Kevin’s advisers failed to understand the GST implications on the sale of real estate, which resulted in a costly outcome for Kevin.

Consequences for Mark:  Mark picked up $300K in GST refunds, which helped him with cash flow, and he was able to start development sooner than planned.

Consequences for Kevin: Kevin lost $300K in cash/profit. Due to this cash flow shortage his next project got delayed causing further costs to Kevin.

What would HK do differently if we acted for Kevin?

  • Make sure the contract price is exclusive of any GST payable;
  • Make sure there is a “backup” Margin Clause in the contract if anything changed and the existing residential land became subject to GST;
  • Advise not to demolish the house before settlement

 Case Study 3 – Commercial Property

Structuring

Max and Hanna purchased their first commercial property for $500,000 in 1990. Over the next 10 years, they successfully increased their real estate portfolio to five properties costing them $3M. All the properties are commercial blocks of land with retail shops and medical centres, returning a healthy rental income. Current market value of the properties is $15M with no debt.

Due to the very poor initial advice Max and Hanna acquired all of their properties in a single company structure –  MAH Investment Pty Ltd. Both Max and Hanna are directors of MAH Investments and both Mark and Hanna are equal shareholders of the company.

Max and Hanna have a residential house in Bulimba worth $5,000,000 with $500,000 debt on it. The house is owned by M & H as joint tenants.

Outside the commercial properties, Max is retired, enjoys his time at the golf course and plans to substitute his previous earnings by drawing on the rental income from the company. Hanna is a self employed civil engineer earning $200K a year which she takes as a wage from her business.

Max and Hanna would also like to support their only child by passing on some of the rental income generated by the company to him to substitute some income to take some time off with his young family.

Max and Hanna have come to Hoffman Kelly for a review of their group structure to discuss the tax impacts of their plans.

What Hoffman Kelly has identified: 

Problems:

  • Max & Hanna have no flexibility in how the rental income accumulated in the company can be distributed to Max. As they both hold ordinary shares, any dividend payments must go to Max & Hanna equally. Max needs $200K per year to support his lifestyle, but as Hanna already earns $200K per year, she will be taxed at the top marginal rate of nearly 50% on any dividends.
  • Max & Hanna have no way of distributing company profits to their son tax effectively, they will have to pay tax on this at personal rates of almost 50% before then passing the remaining amount on to their son.
  • There is a large accrued capital gain on eventual sale of properties. Currently there is an unrealised capital gain of $12M in the company, none of which is eligible for the 50% capital gains tax discount as companies cannot access this.
  • Further, once the properties are sold, profits can only be distributed to Max & Hanna as dividends personally attracting top marginal rate of tax.
  • Asset protection is poor. Both Hanna and Max are the directors of the company and both Hanna and Max are the owners of their family home (which has substantial equity), while Hanna is also director of her engineering firm. If anything ever goes terribly wrong in Hanna’s business and she is held personally liable for debts, they could lose at least 50% of their current net wealth.

What did we do:

  • Went through a lengthy analysis of “what if” scenarios and came to the conclusion that getting properties out of the company now is way too costly due to stamp duty and tax implications. Similarly, transferring shares would trigger substantial capital gains tax liabilities.
  • We worked with Mark & Hanna with a specialist lawyer to put some asset protection measures in place to protect the wealth already accrued. This included undertaking a specific strategy to gift equity to a related trust that improved the personal situation should there be a claim personally.
  • We gave proactive tax advice, which ensured that based on the circumstances Max & Hanna were able to maximise their after tax position each year.

What we would do differently:

From the start, we would advise to acquire properties each in separate legal entities. These separate legal entities would have been discretionary trusts as this would have ensured we had:

  • Access to the 50% general capital gains tax discount upon sale (depending on ultimate beneficiary);
  • Ability to share income between Max & Hanna in the most appropriate manner (eg. To Max only when he needed to substitute his personal income);
  • Ability to tax effectively support their son and his young family by distributing income to him that he would pay tax on in replace of his wage while taking time off;
  • Potential ability to have a more efficient estate planning outcome in passing property to the next generation as and when they wished;
  • Far superior asset protection position with no links between Hanna’s business risks and the property portfolio.

TAKE AWAY FOR CONSULTANTS

Hoffman Kelly are highly specialised in all facets of property development and the industry.  We take a great pride in our work and we would like to make sure that your client is succeeding by maximising the value of the Project.

Your job will be more rewarding knowing your client is in good hands and is receiving the right information to progress their project. Hence, it is critical that your client is talking to an expert property accountant from the first step of the development.

Hoffman Kelly’s expertise do not stop at property development. Whether you are a project manager, real estate agent, civil engineer, architect, builder or anyone in the development  sector, we have the right contacts and experience that guarantee the best service in this field.

 EVERETT Property Development Management is focused on working with clients and consultants to assess the feasibility of sites. We often come across development applications that are not feasible, so the project stops after the client has invested significant amounts of money into contracting on the land and obtaining a development approval!

Contact EVERETT Property Development Management before clients transact on sites and let’s do what we do best and deliver projects.

 TAKE AWAY FOR DEVELOPERS / LAND OWNERS

  • Whether you are a current landowner starting a new venture, searching for your first property, or an experienced developer and growing an existing business, Hoffman Kelly can assist you from the very first step of the development and navigate through the entire process. We have the technical knowledge, personal experience and a strong network of professionals in the industry to assist with all needs. We focus on establishing the right structure that fits you and your project while extracting the maximum value of the development.
  • EVERETT is continuously seeing 1 page excel feasibility studies showing 15 to 20% profit. But in reality, it is highly unlikely reflecting anywhere close to the projected numbers. EVERETT recently looked at a feasibility study for a townhouse development projecting a 15% profit. After EVERETT modelled the feasibility study, it was showing -15%. EVERETT found multiple holes in the feasibility. Our key take-away for developers is to ensure you undertake thorough due-diligence with your advisory team and have your feasibility independently reviewed and stress tested.

 To discuss Feasibility Studies / Development & Project Management contact  Dan Everett of EVERETT Property Development Management mail@daneverett.com.au

To discuss Accounting and Agreement Structure enquiries for your next project contact Michael Kerwin and Elena Lenda of Hoffman Kelly Chartered Accountants  michael@hoffmankelly.com.au  elena@hoffmankelly.com.au