Property Transactions

Buying off the Plan

The purchase of a property off the plan is based on a concept or a dream – there is no physical property to inspect at the time of the contract negotiation. As a purchaser, you will want certainty with respect to essential matters such as size, layout, finishes, views, car parking, storage, recreational facilities, building standards and so on. What you actually receive on completion may very much depend on the skill of your solicitor in negotiating essential amendments to the contract before you are committed.

The Right Purchaser

If you are purchasing an investment property (whether commercial or residential) make sure you have carefully considered which legal entity should be nominated as the purchaser of the property. For asset protection reasons, financial advisers often recommend that investment properties be acquired by a family discretionary trust. However, there is no threshold relief from land tax for properties held in a discretionary trust which means that land tax will be charged at the prevailing rate from zero.

If you intend to sell residential real estate in New South Wales, you must prepare a draft contract for sale for inspection by prospective purchasers before you go to the market.

In addition to certain prescribed documents, the inclusion of other non-mandatory documents such as an up-to-date identification survey or a building certificate may assist purchasers and thereby facilitate a prompt sale.

The procurement of a building certificate from the Local Council may provide a purchaser with an assurance that irrespective of the approval status of the improvements, the Council will not issue any orders against the property. The application for a building certificate should be made well before going to market as there is no guarantee that the Council will issue the certificate.

Tax Planning for Property Development

Before embarking upon any property development project, you should obtain advice as to the associated tax outcomes. The commencement point is whether the transaction is on revenue or capital account. The tax treatment of a project will usually fall into one of the following categories:

• The disposal of trading stock in the course of carrying on a property development business (revenue account)
• A profit making scheme (revenue account)
• A capital gain on the disposal of a CGT asset (capital account)

If you are not in the business of property development nor undertaking a one-off profit making scheme, the sale or disposal of the property may be a mere realisation of capital. As such, there will be no income tax consequences. But, the disposal will constitute a CGT event and therefore taxable under the CGT provisions.

The mere realisation of capital for land acquired prior to 19 September 1985 would not ordinarily attract CGT. However, if capital improvements (such as the construction of house or multiple dwellings) have been made to the land after 20 September 1985, the improvements may be considered a separate asset to the land and attract CGT on part of the sale proceeds.

Structuring a Property Development

Having identified the potential tax outcomes, it is then necessary to determine which of a variety of structures would be the most appropriate to house the project. Although there are a wide range of possibilities, the following structures are perhaps the most utilised:

• Individuals
• Partnerships
• Discretionary Trusts
• Unit Trusts
• Companies
• Development Management Agreements
• Unincorporated Joint Ventures.

In addition to a consideration of the tax issues, the ultimate selection of the structure may depend on the profile of the parties, whether the property is to be held on capital or revenue account, the length of time to realise a profit and the appetite of the parties for complex arrangements.

Partition occurs where land jointly held by say two (2) parties A & B is subdivided into say two (2) new lots. On registration of the subdivision, the titles to the two (2) new lots will each issue in the joint names of A & B. Partitioning would then involve the disposal by A of the interest in one lot to B and the corresponding transfer by B to A of the interest in the second lot. The result is that A will own one lot and B the other. Partitioning can also be applied where two (2) or more parties have a joint interest in a strata titled building with each lot in the strata plan being held jointly by all parties. Following partition, each lot (apartment) will then be held by one party exclusively.

Unless the value of each lot or apartments is the same, some amount of stamp duty will need to be paid at the time of partition. CGT & GST are also relevant considerations and need to be addressed before the acquisition of the land or the partitioning of a building.

Partitioning should not be confused with the subdivision of land. Torrens Title subdivision only involves the creation of new allotments from an existing parcel of land. Strata subdivision is the subdivision of a building into strata lots and common property. However, the practical steps of partitioning may involve the subdivision of land or buildings whereby the new lots are transferred between co-owners.

At the local government level and beyond, the approvals process is beset by inconsistencies and inordinate delays. With hands on experience in the property development industry, we are well qualified to provide both legal and practical advice with respect to all aspects of the process including:

• Preparation of development and modification applications
• Representation at pre-lodgement meetings with Council and in the Land & Environment Court
• Access to a broad range of professional consultants and experts.

An option to purchase land is a strategy used by many developers to keep their foot on a development opportunity without incurring the usual up-front costs of an outright purchase. It can also address the so-called planning risk associated with any opportunity by allowing the developer the time and opportunity to lodge a development application and/or discuss the planning issues with the consent authority before fully committing to the project.

The option may be a call option where the buyer has the right but not the obligation to purchase the land from the seller or a put option where the seller has the right but not the obligation to sell the land to the buyer. In practice, call and put options are invariably combined in the same Deed with the longer exercise period for the call option preceding the shorter put option. For example, the combined Deed may provide for a call option period of say 12 months followed by a shorter put option of say 14 days starting from the expiration of the call option period. If the buyer has not exercised the right to call within the call option period, the seller would then have the choice to exercise the right to compel the buyer to purchase.

Whereas the deposit required for an outright purchase is usually a full 10% of the purchase price, a call option fee can vary between 1-2% of the purchase price. The Deed will almost invariably provide that if the call option is not exercised, the option fee is non-refundable. Should the call option be exercised, the call option fee is almost always credited to the deposit payable under the contract for sale triggered by the exercise of the option.

As a result of a suite of amendments to the NSW Duties Act in 2014, the following applies:

• Transfers (including novations, assignments and nominations) of any option to purchase land will be subject to duty.
• The amount of the duty payable by the transferee will be the consideration for the transfer or assignment (that is the nomination or assignment fee payable by the transferee) plus the ad valorem duty on the value of the underlying land.

As a result of more recent amendments to the Duties Act, from 19 May 2022 duty is also payable on the grant of an option, with the duty payable on the amount of the option fee.