Property Developments & Trusts: why the ATO are targeting you!
On 28th July 2013, a taxpayer alert was issued warning property developers using a trust to access the beneficial capital gains discount, instead of recording sales income on revenue account, that the ATO have begun audits in this area.
A mischaracterisation has been identified by the ATO where a property, either commercial or residential, is later sold with the proceeds being classified as a capital gain event (which can attract a 50% discount), rather than as ordinary income. The sale of property by a property developer is classified as ordinary income as this action is considered part of the nature of the business.
If caught deliberately trying to use trusts to 'disguise' the proceeds of developments, penalties of up to 75% can be applied.
The specific concerns of the ATO and areas they are targeting:
1) The property constitutes trading stock on the basis that the trust is carrying on a business of property development
2) The gross proceeds from the sale constitutes ordinary income on the basis that the trustee is carrying on a business of property development
3) The net profit from the sale is ordinary income on the basis that, although the trustee is not carrying on a business of property development, it is involved in profit making undertaking
Who this Taxpayer Alert is aim at:
- Trusts that have been established for the purpose of acquisition, development and sale of property
- Trusts that have trust deeds stating the purpose of the trust is to hold the development property as a capital asset to generate rental income
- Activity by the taxpayer is opposite to the stated purpose of treating the developed property as a capital asset
- Properties that are sold as little as 13 months after purchase
- Trustees that treat the sale proceeds as being on capital account and claims the general 50% capital gains tax deduction
What can PKF Lawler do?
The taxpayer alert is concerned about the mischaracterisation of revenue for property developers and the potential risks for not complying. At PKF Lawler we have a vast experience in dealing with property developments and ensuring the appropriate tax treatment. Should you have any concerns in relation to the above alert, please contact your local PKF Lawler contact.