Property Law Developments for Property Developers – What You Need To Know
Taxes are always a contentious issue in the current property development landscape. They serve an important source of revenue raising for our Government and allow the construction of infrastructure, the implementation of education schemes, the assistance and benefit for those disadvantaged and a myriad of other Government initiates that generally improve the lifestyle of your average citizen. Yet no one really ever wants to pay tax.
Ever since the first tax was charged, individuals and businesses alike have been attempting to limit their taxation liability by employing various avoidance strategies. Some above board, some below. A phenomenon has taken the spotlight recently where companies seek to avoid taxation liabilities incurred in the sale of real property developments and in response, the Government has changed the tax legislation to stop this activity. This phenomenon is called “illegal phoenixing”.
What is Phoenixing?
Illegal phoenix activity occurs when a company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying its debts.
In the context of the property development industry, illegal phoenixing often involves developers transferring company assets to another company with the same or similar name (for little or no value) before handing the company over to an external administrator. In this way, the directors seek to avoid paying any creditors, employees or the Australian Taxation Office (ATO) which can be the company’s biggest creditor.
How this works in practice is that the directors of a company (let us call it Company A), set up a new company (Company B) with the same directors and shareholders. Company A buys and develops a large parcel of land into new units, houses or commercial buildings. Company A sells these properties, incurring GST liabilities on the sales. Company A transfers its assets to Company B, stripping Company A of its assets and then enters into liquidation. The directors and shareholders carry on the business under the ‘rebirthed’ Company B, which is not liable for any of Company A’s debts, creditors or employees.
Illegal phoenix activity poses substantial risks to the integrity of the property industry and revenue collection. In April 2015, the ATO reported that illegal phoenixing in the property construction industry alone costs the Australian economy an estimated $3 Billion annually. Despite this, it is important to note that not all phoenixing activity is illegal. Genuine company failure and liquidation where directors have responsibly administered the company, is legitimate.
So, what are the government doing to stop illegal phoenixing?
Legislative Reform – Withholding GST
Currently, developers can have up to three months to remit GST after the sale of newly constructed residential premises, allowing dishonest developers time to illegally phoenix their company and avoid payment to the ATO.
To combat this loophole, the Treasury has recently released draft legislation that will require purchasers of new residential premises and lots in new residential subdivisions to withhold an amount equal 1/11th of the purchase price and pay this directly to the ATO as part of the property settlement process. These changes are coupled with extended investigative powers of ASIC and the National Phoenix Taskforce still to be rolled out.
Implications for Property Developers and Purchasers
From 1 July 2018, a supplier (the developer or building company) will be prohibited from making a taxable supply of “residential premises” or “potential residential land” unless, at least 14 days before making the supply, they give to the purchaser a written notice including:
- whether the purchaser will be required to make a payment; and
- if so, the amount required to be paid and when the amount is required to be paid.
Importantly, a notice must be given each time residential premises are supplied as a taxable supply. Furthermore, where a supply of new residential premises is made under the margin scheme, the supplier may apply to the ATO for a refund of a portion of the amount withheld by the purchaser.
If you are looking to purchase property from 1 July 2018, or if you are a developer looking to sell property after this date, be aware of the legislation changes and ensure your lawyer or conveyancer is considering the new Anti-Phoenixing obligations and the effect of the client payments to be made to the ATO.
If you would like further information on anti-phoenixing changes, please contact our office on 6198 3100.