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

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The parties would need to carefully negotiate the timing of any payments to the builder given that, in many cases, the landowner will only realise the value of their land on its eventual sale but may have to pay the builder ‘progress payments’ in the meantime (potentially leaving the landowner ‘out of pocket’ for a long period of time).  

One way to address this issue is for the builder to ‘loan’ amounts to the landowner during the course of the development, with interest being charged (and accrued) on the loan at commercial rates and security taken over the property. The ‘loan’ (plus accrued interest) would be repaid to the builder from the proceeds of the sale of land (which may be done progressively as the developed units are sold). This ensures that the landowner can receive payment for the use of their land for development ‘upfront’ without disposing of the land.

Can the landowner recognise income on capital account?

Depending on the terms of the agreement, an arrangement of this type may allow the landowner to sell the property as a ‘mere realisation’ of an asset on capital account.  

This will obviously depend upon the precise activities of the landowner, the nature of their land holding, the extent of involvement they have in the development and the agreement they have with the developer. For example, the builder may offer to pay the landowner a fixed amount (perhaps based on the value of the land at the beginning of the project) for the entitlement to develop and sell the property. The developer would then bear all of the development risks but also the rewards of the development.

In such a case, the landowner would have minimal involvement with the development. From the builder’s perspective, it can access land to develop without purchasing it (i.e., it is not trading stock and is, in fact, completely off-balance sheet) and without attracting stamp duty.

Alternatively, the arrangement could be varied so that the landowner is involved more in the development, or to adjust the ‘sharing’ of the profits (although, it should be noted that, this will make it more difficult to argue that any sale by the landowner is purely on capital account).

 

  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
  • Alternatively, you can book an appointment in our live calendar.

 

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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