Using joint ventures to develop property (3) – Structuring alternative: ‘Profit-sharing’ arrangements (1)

Managing Joint Ventures in Property Development

When participants in a joint venture (JV) are involved in property development, they may encounter challenges regarding the treatment of the land as trading stock. This can impact deductions for development expenses and potentially lead to a gain for the original landowner before the land is sold.

Avoiding Transfer of Dispositive Power

To prevent the land from being treated as trading stock for participants, it's beneficial to ensure that dispositive power over the land is retained by the landowner. This can be achieved by engaging a builder to construct units without transferring control of the land to them.

Contractual Arrangements

To address concerns about profits and payments, participants can enter into contractual agreements where:

• The builder funds the development and is paid upon unit sales.
• The landowner pays the builder a share of profits upon sale, considering their contribution.

Clarifying the Agreement

To avoid forming a partnership inadvertently and ensure deductibility of payments, it's crucial to clarify that:

• The arrangement is for construction services, not profit sharing.
• The payment formula is clearly defined to mitigate the risk of profit sharing interpretation.

Seeking Professional Advice

Structuring such agreements requires careful consideration and professional advice to ensure compliance and mitigate risks.

For any further inquiries or assistance regarding joint ventures in property development, feel free to contact Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.