The ATO has issued a Taxpayer Alert and indicated that it plans to investigate several hundred property developers using special purpose trusts to undertake developments. Taxpayer Alerts are designed to be an early warning to taxpayers of arrangements which the ATO considers to be high risk and are currently being targeted by the Tax Office.
The first Taxpayer Alert to be issued for 2014 is targeted at property developers who are undertaking developments in special purpose trusts. The type of arrangement highlighted involves a property developer using a new or special purpose trust to carry out a development. In some cases the trust deed specifies that the purpose of the trust is to develop and hold the asset to generate rental income. The property is in fact developed and sold soon after completion and the profit on sale is treated as a capital gain. The capital gain is distributed to the beneficiaries and those beneficiaries who are individuals or superannuation funds claim the capital gains tax discount to reduce the tax payable on the capital gain.
The Tax Office considers that the profit should in fact be treated as ordinary assessable income subject to full tax rates. They have commenced a number of audits and are issuing amended assessments. Any special purpose trust which has sold land which has been developed by the trust might be affected by the Tax Office’s investigations. We can assist in determining the correct treatment of the arrangement and give advice on how to deal with the matter, including whether a voluntary disclosure should be made