Utilizing Joint Ventures in Property Development
Joint ventures (JVs) can be a beneficial structure for property development in various scenarios:
1. Sharing Output, Not Just Income or Profits: Property development JVs allow parties to share the actual output of the activity, such as the developed property itself. This differs from merely sharing income or profits, making JVs suitable for sectors like property development, mining, and primary production.
2. Unrelated Parties with Different Resources and Skills: In property development involving unrelated parties, each party often brings unique resources and skills to the project. JVs enable them to agree on specific parts of the final development, each retaining separate tax treatment and liability. Additionally, each party can choose their preferred entity for JV participation.
3. Family-Based Joint Developments: JVs can also be employed within family contexts, separating the land-owning entity from the building/construction entity.
4. Considerations for Landownership in JVs: In JVs where only one party owns the land, the agreement typically grants other venturers rights over the land, possibly proprietary rights. If these rights include 'dispositive power' (the ability to dispose of the land) and the venturer is in the business of land development, the land may be considered trading stock. This can impact tax deductions for expenses incurred.
5. Deferred Deductions and Timing Issues: Expenses related to trading stock not accounted for by the end of the financial year may not be deductible until the stock is on hand. Additionally, transfer of dispositive power may affect the landowner's tax position, potentially crystallizing gains earlier.
6. Considerations for Building/Construction Entity: If the arrangement grants or will grant dispositive power over the land to the building/construction entity, they may prefer an alternative arrangement to avoid potential issues.
Careful consideration of tax implications and agreement terms is crucial when utilizing JVs in property development.
For personalised advice on structuring property development JVs, reach out to Tax Ideas Accountants & Advisers at +61 2 8318 1545 or schedule an appointment through our live calendar.
