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Property developers warned on contrived structures that muddy income/capital divide – October 2014
The Tax Office has warned property developers against using trusts to return the proceeds from projects as capital gains instead of income, warning that it has found many instances that had subsequently been shown to be contrived arrangements to allow developers to inappropriately claim CGT concessions.
In a statement, the Tax Office said it had “already raised millions in adjustments from people who exploit the system and our current compliance activity shows we are likely to make many more adjustments in the coming months.”
Profits from property developments that have been treated as capital gains are high on the Tax Office’s target list right now, with it concurrently issuing a “taxpayer alert” as a warning about arrangements that display all or most of the following:
Simply stated, if a property developer has treated development profits as capital gains, the Tax Office is likely to put this under scrutiny. Penalties can reach up to 75% of the tax avoided in deliberate cases.
Capital vs revenue: It’s nothing new
However while the Tax Office has warned about exploitation of the system and inappropriate claims, the fact is that the distinction between capital and revenue has been the source of disputes and litigation ever since it became clear that distinct tax outcomes were dependent on how profits could be categorised.
“Intention” seems to have been the pivotal factor in many instances. A recent court decision focused on the intentions (that is, to hold or develop) of the property owners. In this case, the best legal argument about wanting to hold a property for long-term rental income was trounced by other evidence from a financier that showed an intention to build, rent, and sell.
It is important to remember that the onus of proof rests with taxpayers. With this in mind, property developers may be better advised to get appropriate tax advice at the time developments are being planned and document evidence of their intentions at that time. The (capital or revenue) profit intention of a taxpayer is based upon their individual facts and circumstances.
By obtaining the right advice from a suitably qualified professional the risk of any future conflicts over stated intentions and the consequent activities undertaken is mitigated. The taxpayer should also be mindful of the documents they provided to financiers and so on when providing documents to the Tax Office and any court or tribunal as this may either better align with their stated characterisation or alternatively disprove it.
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