Taxpayer Alert – ATO Spotlight on Property Development

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On 28 August 2014, the ATO will release Taxpayer Alert TA 2014/1, casting doubt on the tax treatment of property development structures that use trusts to stream discounted capital gains from the sale of the developed property to the trust’s beneficiaries.

Specifically, Taxpayer Alert TA 2014/1 calls into question the tax treatment of gains realised in relation to property development arrangements, whereby the ownership of the property is held separately in a special purpose trust.  The ATO’s view is that in such circumstances, the trust holds the property on revenue account, and not capital account.  The impact being that any gain realised by the trust on the subsequent sale of the developed property will not be subject to capital gains tax and therefore is ineligible for the general CGT discount.  Instead, the ATO considers that the trust should recognise the gain as ordinary income, in which case the gain will be fully assessable to the beneficiaries (with no access to the general CGT discount).

The ATO state that they have already commenced a number of audits involving this kind of arrangement and intend to continue their investigations specifically targeting property development activities.  It is noted however that Taxpayer Alerts are an early communication from the ATO identifying specific arrangements and schemes currently being targeted by the ATO.  That is, at present there is no judicial or legislative support for the blanket approach of revenue treatment proposed in Taxpayer Alert TA 2014/1.  Notwithstanding this, those taxpayer’s who may be involved in such arrangements are advised to seek independent advice in relation to their personal exposure.

Taxpayer Alert 2014/1 can be viewed here.