MGS Private can arrange to structure a property development whereby retained property may be moved to another entity and protected.
Legislation/Other Material: Designers and Building Practitioners Act 2020, Designers and Building Practitioners Regulation 2021, Design and Building Practitioners Amendment Regulation 2022, Duties Act 1997, Income Tax Assessment Act 1936, Income Tax Assessment Act 1997
The Designers and Building Practitioners Act 2020 (the Act) and the Designers and Practitioners Regulation 2021 (the Regulations) was enacted on 1 July 2021.
The Design and Building Practitioners Act 2020 (DBP Act) establishes a statutory duty of care for economic loss caused by defects in or related to a building. This duty applies to persons carrying out construction work and is owed to the owner of the land where the work occurs. Importantly, the duty has retrospective application, covering economic losses that became apparent within 10 years immediately before the DBP Act commenced (subject to relevant limitation periods). It remains in effect even if an action for breach of common law duty of care was initiated before the statutory duty came into force
Before the enactment of the Act, the prevailing common law stance, as established by several High Court cases, held that builders were not obligated to exercise a duty of care to prevent economic loss for subsequent property owners. However, under Part 4 of the Act, specific parties are now bound by a duty to current and future property owners. This duty requires them to exercise reasonable care to prevent economic loss arising from defects related to a building resulting from construction work. Here are some key features:
Parties Covered: The duty of care extends to individuals involved in construction work, including builders, designers, manufacturers, suppliers of building products, and supervisors, coordinators, and project managers.
Beneficiaries: The duty applies to both current and future property owners, and it is not limited to residential buildings.
Definition of Construction Work: While the Act currently defines construction work to include residential building work under the Home Building Act 1989, it allows for additional categories of work to be specified by regulation (although this has not yet occurred).
Strata Schemes and Community Land: If the land is subject to a strata scheme (as defined by the Strata Schemes Management Act 2015), the owner includes both the lot owner and the owner's corporation. Similarly, for land subject to a community, precinct, or neighbourhood scheme (as per the Community Land Management Act 1989), the owner encompasses the lot proprietor and the association for the scheme.
Leasehold Strata Schemes: The duty also extends to leasehold strata schemes, even though they currently lack statutory warranty rights.
Smithco Pty Limited is the trustee of the Smith Family Trust. The trust owns 3 properties in Queensland. Each property has a taxable value of $300,000. Two additional trusts are established, and the properties separated with no stamp duty.
A structure should be considered whereby a holding company is established and a consolidated group formed. Any third-party lending should be structured in the entity that will ultimately own the 10 commercial offices. This entity borrows from the holding company who in turn borrows from the bank.
Following the completion of the development, the 10 commercial offices can be transferred from Smithco Developments Pty Limited to Smithco Investments Pty Limited without income tax and only 10% of the duty otherwise payable. The transfer is undertaken pursuant to the mortgage.
This example is the same as example 1, however in this case the developer is a unit trust and the ultimate owners of the 10 commercial offices will be a unit trust. The owner of the unit trusts is a company. In this instance there are two options to move forward. Either a consolidated group may be formed or the movement of the 10 commercial offices could be undertaken under Subdivision 126-G of the Income Tax Assessment Act 1997 (ITAA97).
Additional requirements would be imposed should the decision be made to rely on Subdivision 126-G of the ITAA97. This is because the Commissioner needs to be convinced that the retained 10 commercial offices are on capital account. This is not an issue should the entities decide to form a consolidated group under Part 3-90 of the ITAA97.
Note: A GST Group under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 would need to be registered if GST would otherwise apply.
In this example the entities are all unit trusts and therefore there is no ability to consolidate under Part 3-90 of the ITAA97. The advantage of a non-consolidated structure is that any future disposal by the Smith Investment Unit Trust may attract the CGT discount contained in Subdivision 115-A of the ITAA97. The capital versus income considerations in relation to the application of Subdivision 126-G of the ITAA97 may apply.
Note: A GST Group under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 would need to be registered if GST would otherwise apply.
