Property development and SMSFs – Part 4: Taxation considerations

In the third instalment of the four part series on self managed superannuation fund trustees developing property, we discussed the limitations on fund trustees borrowing to develop property and the importance of properly documenting property development arrangements.

In this final instalment, we consider the commercial and taxation drivers of a land development project involving a self managed superannuation fund.

Acquisition of the development land

Stamp duty

Where an entity, being the fund trustee or the trustee for a unit trust, acquires vacant land, the purchase will generally be subject to stamp duty in the normal manner at the transfer duty rates.
If the development land is contributed to the fund as an in specie contribution (subject to ensuring the superannuation law is complied with and the in specie contribution does not give rise to an excess contributions tax liability), the in specie contribution of the development land will be exempt from stamp duty pursuant to section 41(1) of the Duties Act 2000 (Victoria) (Duties Act) if the following conditions are satisfied:

  • the transfer is not for any monetary consideration;
  • the fund is a complying superannuation fund; and
  • there is no change in the beneficial ownership of the development land,

and an application is made to, and accepted by, the Commissioner of State Revenue.

For the purposes of section 41 of the Duties Act, the transfer from a ‘beneficiary’ of the fund to the fund trustee does not effect a change in the beneficial ownership of the development land.

Importantly, the stamp duty provisions vary from state to state and this exemption only applies where the development land is located in Victoria.

The acquisition of units in the unit trust holding the development land will be subject to transfer duty (5.5%) if the unit trust is ‘land rich’ and the acquisition (alone or with other acquisitions) amounts to an interest of 20% or more in the unit trust.  The unit trust will be ‘land rich’ if the value of the development land is at least $1 million and the value of all its land (Victorian and elsewhere) is at least 60% of the value of all property of the unit trust.

The Victorian government is replacing the ‘land rich’ duty provisions with the ‘landholder’ duty model from 1 July 2012.  Under the landholder duty model, the 60% test will be removed so that transfer duty will apply to any acquisitions of interests of 20% or more in a unit trust with land worth more than $1 million.  The definition of land is also extended to include anything fixed to the land whether or not a fixture at law.

Although the landholder duty applies in most other jurisdictions, the Victorian landholder provisions penalise investors in unit trusts holding land by retaining the acquisition threshold at 20% rather than moving to 50% as in most other jurisdictions.

Importantly, the landholder provisions will also impose duty on direct or indirect acquisitions of an ‘economic entitlement’ of 50% or more in a landholder within a three year period.  An economic entitlement is defined to include acquiring shares or units in the landholder or entering into an arrangement under which a person is entitled to participate in the income, rents, profits, capital growth or proceeds of sale of the landholder’s land or to receive a sum calculated by reference to any such amounts.

This means that property developers and investors in property projects could be liable for duty under the landholder provisions if they are entitled to receive a fee or return calculated by reference to the profits or proceeds of sale of the project.

If the units are contributed in specie to the fund, the contribution should be an exempt acquisition under the ‘land rich’ and the successor ‘landholder duty’ provisions if a hypothetical transfer of the land from the member to the fund trustee would have been exempted from duty under section 41 of the Duties Act. In determining whether an interest of 20% or more has been acquired in the unit trust, an exempt acquisition will be counted with any subsequent acquisition of units in the unit trust by the fund trustee or by any member of the fund or other associated persons or entities.

Land tax

Where a fund trustee or trustee for a unit trust acquires land, the entity should be subject to land tax in the normal manner, but able to avail itself of any land tax exemptions.

The fund trustee will not be subject to the land tax surcharge for trusts as complying superannuation funds are excluded from the surcharge. However, the land tax surcharge will apply to the trustee of the unit trust unless the trustee notifies the State Revenue Office of the unit holdings in the trust.

Goods and services tax

The fund trustee or the trustee for a unit trust would normally be required to register for GST when its current or project GST turnover is $75,000 or more.  In general terms, the current GST turnover is the GST exclusive value of all taxable and GST free supplies made during the previous 12 months and the projected GST turnover is the GST exclusive value of all taxable and GST free supplies likely to be made during the next 12 months. The fund trustee or the trustee for the unit trust may voluntarily register for other reasons.

Where the development land is contributed to the fund as an in specie contribution, the in specie contribution of the land from a member to a fund trustee will not ordinarily be subject to GST. If the member is not registered (or required to be registered) or the member is registered but the development land is not used in the conduct of an enterprise carried on by the member, there is usually no question of GST applying.

The position is different if the member is registered (or required to be registered) for GST and the development land is used in the member’s enterprise.  Although there is no consideration for the supply, an in specie contribution to the fund may be a taxable supply because of the associate rules in Division 72 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). However, Division 72 should not apply to the contribution of the development land if the fund is registered (or required to be registered) for GST and the fund acquires the land solely for a ‘creditable purpose’ (that is, the land is applied to make taxable supplies eg property sales or commercial leasing) (refer to ATO ID 2005/70).  Note that Division 72 could still apply if all or part of the land is developed as residential property for leasing.

Although the development land must be ‘business real property’ to be contributed in specie to the fund, the contribution cannot qualify as a going concern if consideration is not being provided.

Development of the vacant land

Stamp duty

Duty is imposed on a transfer of dutiable property and on certain specified dutiable transactions. Dutiable property includes an estate or interest in land. Dutiable transactions include any transaction that results in a change in the beneficial ownership of such estate or interest in land. A change in beneficial ownership may include the creation or extinguishment of such interests, a change in the equitable interests in land, or land becoming, or ceasing to be, the subject of a trust.

Under a development agreement, the developer generally will not acquire any proprietor interest in the development land (but the developer could acquire an ‘economic entitlement’ in a landholder company or unit trust in the circumstances explained above), thus legal and beneficial ownership of the development land will be unchanged. On that basis, there is no transfer of any interest in the development land or any change in beneficial ownership of any interest in the land. If the owner of the land is a private company or unit trust, the developer might acquire an ‘economic entitlement’ in the owner under the new landholder provisions that will apply from 1 July 2012.

Land tax

The developer under a development agreement will not be an ‘owner’ of the land for land tax purposes . Therefore any land tax liability should remain with the fund trustee or the trustee of the unit trust (as the case may be).

Tax partnership
Where the fund trustee has entered into a development agreement to develop the land, it is important that the parties are not a common law partnership. The reason being that common law partners generally have joint and several liability, which would cause the fund trustee to breach the provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and in particular, the prohibition on charging the fund assets under regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
If under the development agreement, the developer is paid a fee for its services, the developer and the fund trustee generally will not be carrying out the development as a general law partnership.

Sale of the developed land

Capital gains tax

Generally, the capital gains tax provisions are the primary taxing mechanism for determining gains and losses for self managed superannuation funds (section 295-85 of the Income Tax Assessment Act 1997 (1997 Act)).

This means that gains or losses on assets (including units in a unit trust and development land) held by fund trustees will be taxed under the capital gains tax provisions. Therefore, the development land or units in the unit trust will be on capital account instead of on revenue account and included in the fund’s assessable income. Therefore, the sale of the development land will be a disposal for tax purposes under CGT event A1 (section 104-10 of the 1997 Act) and will result in a capital gain where the market value of the land exceeds the cost base (assuming the development land is a post CGT asset).

Where the entity selling the development land is the trustee of the unit trust, the capital/revenue account distinction will still be relevant. Generally, where the development land is held for the purpose of investment, the land will be on capital account. Where the land was acquired and developed as part of a property development business, the developed land is likely to be on revenue account. This will generally be the case where the trustee of the unit trust intends to sell the developed land and make a profit as part of a business venture, particularly if the acquisition and sale is part of a continuous and systematic practice of engaging in business arrangements of this kind (refer to Taxation Ruling TR 92/124).

Stamp duty

The sale of the development land will give rise to a liability for stamp duty payable by the purchaser.  However, the fund trustee or the trustee of the unit trust may utilise the stamp duty concession for ‘off the plan’ sales for the benefit for purchasers.

Goods and services tax

If the trustee is registered or required to be registered for GST because of the prospective sales, the trustee will be liable to pay GST on the sale of the development land. The margin scheme may be available if the fund trustee or trustee for the unit trust did not acquire the development land by a taxable supply that was chargeable with full GST (ie the margin scheme was not used). There are new rules that apply where the development land was acquired by the fund trustee as a GST-free supply of a going concern, farm land or from an associate, where the vendor or associate paid full GST on its acquisition.

Conclusion

We hope you have found the series on SMSFs and property development useful. We would be interested to hear any feedback or comments you have on fund trustees entering into property development arrangements.

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