Accountants and advisers have been urged to take a cautious approach in dealing with property collective sales, with clients potentially losing their capital gains tax exemption and being liable for GST in some cases.
Surprise taxes catching out property owners with big sales
Horizontal collective site sales, where multiple homeowners group together to form residential super-lots, and vertical sales, where owners of individual apartments sell together, has gained traction over the last few years, as property owners search for a higher selling price.
Accordingly, global property network Knight Frank’s market report last September found a six-fold increase in collective sales over the past five years, recording a 17.8 per cent share of total disclosed sales in 2016–17.
Speaking to Accountants Daily, Pitcher Partners partner, Scott McGill said specific circumstances in each deal could raise some flags for the ATO, and potentially disqualify sellers from the CGT exemption.
“If a developer comes along to 30 owners who each have their own individual block and the developer buys the 30 blocks off the owners — your CGT exemption, if you are eligible, is crystallised then and you get the cash and you walk away,” said Mr McGill.
“More often what happens is the developer says you stay the owner, we'll do a development agreement, where we'll provide the building and the construction and all the expertise and when we sell, you'll share in the profits. Now you're the owner and that's staying in the deal because you stay as the owner of the property right until the end when all the stock is sold.
“When you do that, the potential return is higher but the risks are also much higher and you lose your tax status.”
Further, clients who choose to stay in the deal may also face other risks, including GST liability if the developer goes under.
“If you're staying in the deal, it is you that is going to be subject to the GST on sale and you will have personal liability so if the developer goes broke, or if the GST is not paid, guess who's going to come knocking on your door,” said Mr McGill.
“Let's say the developer goes broke, you've got a half-constructed building on your land, you can't sell it, you need another developer to come and bail you out and that can be complicated because if the first developer goes broke, there will be liquidators involved and it could take years to realise the value in your property.”