As Australia’s property market continues to grow, especially in the capital cities of Sydney and Melbourne, more people are turning to property development as a means of investment. Due to the nature and scale of activities involved in property development, it’s important to choose the right legal structure to set up (check out how we can help you choose the right legal structure to maximise your return). However, there is no standard or perfect structure for development, as each project is different and is dependent upon individual circumstances.
- Risk When choosing the right structure for your development project, there are a number of factors to consider. Probably the most important factor to consider is the risk involved and asset protection. The nature of activities involved in property development involves a number of risks with workers on site, money invested and equipment used. While insurance may be able to cover some costs, it is important to limit the potential liability you may face in the event that something goes wrong.
- Taxation: As with most business activities in Australia, property development and the proceeds that arise from it are subject to taxes. Different types of structures are subject to different taxation and compliance, so before setting up your structure you should be aware of the obligations. This becomes particularly important when the project is completed and you decide upon what to do with the property. The type of structure you choose could have a major impact on how much tax you are obliged to pay.
- Parties Involved: One of the key determinants in choosing the right structure depends on who will be involved in the development project. As some structures are only appropriate when related parties are involved, having correct structures and agreements in place at the start of the development will prevent you from running into problems down the track. It is also important that each party is aware of their own obligations and responsibilities when setting out a development project.
Once you have taken all these factors into account as well as your own personal circumstances, you will be best placed to choose the right structure for your property development project. Here are some common structures:
Trusts – Family Trust & Unit Trust
Where the property development activities are being undertaken by a group of family members, a family trust can be an effective way of protecting assets and distributing the income. A trust is a legal mechanism where by the trustee looks after the trust’s assets for the benefit of the beneficiaries. This means that the assets of the trusts and beneficiaries are protected from being sued to a degree, as the trustee is generally the one liable. A great way to extend the protection under a trust is to have a corporate trustee through a proprietary limited company. Using a trust is also the most effective form of tax planning in property development, as the income received from the sale or renting of the property is able to be distributed to beneficiaries at the discretion of the trustee.
A unit trust functions in a similar way, however parties are not related and the amount of benefit that beneficiaries are entitled to is determined by the number of units held.
Proprietary Limited Company
In Australia, a company is considered to be a legal entity that can buy, sell and be sued in its own right so the main benefit of carrying out property development as a proprietary limited company is the limited liability for members to the value of their ownership. Whilst you don’t want to plan for things to go wrong, it’s important to limit yourself and business partners where you can. A company can be a good option where the individuals are not related or family members, as any profit received from the development can be paid out as a dividend to shareholders.
Partnerships are a straight forward option for a development structure, as this may not require any registration or formation other than a partnership agreement. However, as individuals in a partnership are not protected by anything other than insurance, their liability is unlimited in the case that something goes wrong or the development is sued for any reason. This also means that all the costs of the development are incurred by the partners and any profit made is considered taxable income and thus taxed at the marginal tax rate.
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DISCLAIMER: This information was produced as a general information and should not be taken as advice. Individuals should consider their own circumstances before choosing an appropriate business structure and it is best to seek professional advice before making any decisions.