Opening address
Louise Clarke, Deputy Commissioner Private Wealth, opened the meeting by welcoming members and discussed the need for confidentiality when discussing certain topics.
Master Builders Australia economic forecast
Construction activity is set to grow slowly over the next 5 years.
Transport infrastructure will initially drive growth.
As this starts to slow, residential building will take up the baton.
We will struggle to meet the target set out under the National Housing Accord.
Australian Securities and Investment Commission insolvency update
Insolvency activity was up 61.7% for the 2022–23 financial year, 7,942 Australia Companies Entering External Administration (EXADs) compared to the previous financial year (4,912 EXADs). Company failures have rebounded to pre-COVID-19 levels (7,937), or even exceeded them slightly, in all appointment types except for court-appointed liquidations, which remained at approximately 47% of its base level activity.
The increase in EXADs continued into the first 2 months of the 2023–24 financial year (1,773 EXADs), up 26% compared to the same period for the 2022–23 financial year (1,407 EXADs). While it is worth noting that court liquidations have risen to 81% of pre-covid levels in this period, it is too early to determine if this increase will be sustained.
More information about Australian Securities and Investments Commission Insolvency statisticsExternal Link is available.
Capital versus Revenue ATO website guidance
Website content, with 2 examples, was published 6 December 2022 on ato.gov.au for taxpayers and their advisers to better understand the tax consequences on sales of small-scale land subdivisions.
The content was updated in July 2023 with 2 additional examples published to the legal database, designed to further inform taxpayers and tax advisers on how the ATO might interpret the distinction between capital and revenue in relation to small scale property development activities.
Thank you to all forum members who contributed through providing feedback during the more recent consultation period.
Since publishing of the additional examples, an exponential increase in unique page views has occurred. The 3-monthly average for the period July 2023 through to September 2023 saw 1,000 views, which is a 66% increase compared to the monthly average between December 2022 to June 2023.
We now plan to invest further in this product, with the gradual creation and expansion of a comprehensive and more complex set of examples (following general principles) that are focused on the questions we commonly receive from small scale property developers.
The ATO will consult again with forum members, seeking feedback on their drafting.
ATO research
Influencers in property development
The Royal Melbourne Institute of Technology (RMIT) were engaged and in May 2023 provided their influencers in property development 2023 report.
RMIT found that non-property related advisers are those who influence the tax decisions of property developers, such as, tax advisers and accountants.
Property related advisers generally don’t influence tax decisions.
RMIT found that real estate agents and conveyancers did not have much of a role to play when it comes to tax matters.
If the research had identified additional tax decision advisers, such as real estate agents or conveyancers, we would need to consider our engagement with these key influencers.
GST concessions and the property industry
The University of NSW (UNSW) were engaged to understand the effectiveness of GST concessions available for property transactions.
Invitations to participate in a survey were sent via email in May however UNSW did not receive enough survey responses to undertake meaningful analysis.
Invitations to participate in an interview were sent via email in September and while responses are still low, it is anticipated that some analysis will be possible.
We hope to receive a report once interviews are conducted, and analysis undertaken.
Record keeping education directive
If an entity is subject to a review and the ATO determines the business has not kept accurate and complete records, the Commissioner of Taxation can direct the entity to complete an approved record keeping course or impose a financial penalty.
An entity directed to complete the record keeping course will have 28 days to complete the course.
The record-keeping education learning modules will be available via an online learning site, which will be launched in the second half of 2023. The modules can be completed at a time that is convenient for the entity. It includes topics such as:
- what records you need to keep, and for how long
- the best ways to keep records
- the benefits of keeping accurate and complete records
- how to keep records secure.
ANZ property council Australia survey
The property council survey for the September 2023 quarter highlighted, despite uncertain macroeconomic conditions, that confidence in the Australian property sector has held firm, especially within individual business.
Construction activity expectations are generally positive across all asset classes, except for the retail and office sectors, where they dipped slightly into negative territory.
Expectations regarding construction activity in the retirement living sector have hit their highest mark since the December quarter of 2021.
Expectations for residential construction are at their peak in over a year, and industrial construction expectations have reached their highest level since the September quarter of 2022.
During the September quarter the survey involving 696 property professionals indicates that companies continue to have faith in their work schedules and staffing capacities.
Sectoral property specialists (survey participants) have moderated their expectations regarding future interest rate increases.
2023-24 GST focus areas for public and multinational businesses
Taxpayers generally seem to be well across the relevant provisions.
Taxpayers generally claiming no ITCs on land acquisition and development costs as they relate to future input taxed supplies of residential premises.
Some taxpayers have made partial ITC claims on these costs to reflect taxable supplies in relation to office/retail space, others are yet to implement an apportionment method.
A key observation is the importance of making Division 135 adjustments when the going concern is acquired (rather than when development starts or is completed) if there is an intention to make future input taxed supplies.
Areas for consideration are:
- correct classification of supplies
- Division 135 and Division 129 adjustments
- use of a fair and reasonable apportionment method for costs and use of methods of direct attribution as per existing guidance, including shared services type costs, for example marketing, legal
- treatment of related party transactions, including Division 72 and Division 84
Build to rent consultation
The build to rent (BTR) consultation commenced in February 2022 to explore the emerging models of BTR in Australia to understand the opportunities to support the industry with their tax obligations.
The consultation resulted in the ATO improving our understanding of the BTR industry and ato.gov.au being updated to improve guidance for industry.
Consultation has highlighted the complexity of the various BTR models and associated tax issues. The ATO is considering if further improvements can be made to public guidance to support industry getting their GST obligations correct.
Build to rent industry observations
A BTR industry observations presentation was done by the Urban Development Institute of Australia and William Buck, with input from Frasers Property.
Industry discussed the different issues that arise for purpose built BTR versus changes to existing assets or projects to deliver BTR.
The presentation discussed 2 key administrative issues:
- Commercial Residential Premises versus Residential Premises
- Input Tax Credit Apportionment including adjustments after purchasing a going concern and adjustments for changes in creditable purpose.
Industry acknowledged the role the ATO has in administering the law and advocated for a review of key rulings.
Debt approach
The ATO is committed to shifting payment behaviours that have contributed to the growth in debt over the past few years. Given the high levels of unmanaged debt in the property and construction sector, this will be a strong focus area for us.
Firmer action will be used for clients who:
- are unwilling to work with us
- refuse to negotiate, or repeatedly default on agreed payment plans
- don't pay and don't take steps to resolve their situation
- have been subject to an audit where we detect deliberate non-compliance and payment avoidance continues
- appear to be engaging in fraud activities.
We will increase our use of debt enforcement tools for entities that are not meeting their obligations, including:
- the disclosure of business tax debts to credit reporting
- applying director penalty notices to make directors personally liable
- issuing garnishee notices
- legal recovery including windups and insolvency.
Offshore financing by high-net-worth individuals
We have observed behaviours and risks in the property and construction industry in some privately owned groups, particularly with respect to adopting non-arm’s length terms and conditions for their inbound related party financing arrangements, resulting in excessive interest deductions.
Behaviours observed which are inconsistent with common industry practice between third parties include:
- no or limited equity contributed
- undocumented or inadequately documented funding arrangements
- borrowing on subordinated unsecured terms when there appears to be senior debt capacity available
- excessive interest rates
- using unsecured debt when security is available
- conduct which is inconsistent with explanations of the funding arrangement, that is the purpose of the loan
- loan principal remaining unpaid well beyond project completion and sales with interest continuing to accrue
- adopting a ‘set and forget’ approach
- an absence of transfer pricing analysis and support for cross-border arrangements that are significant to the overall funding and material to the taxpayer’s tax positions
- incorrectly applied thin capitalisation rules including the application of the annual $2 million threshold on an associate inclusive basis.
In some instances, we have also observed practices that result in the deferral of or non-compliance with interest withholding tax obligations.
For inbound financing in the Australian property and construction industry, we seek to understand the particular facts and circumstances of the property investor or developer, as well as:
- the external and internal funding structure including equity deployed during the investment / project lifecycle and loan to value ratio (LVR)
- how related party financing terms and conditions including pricing compare with external debt or other comparables for a particular project, and changes in project circumstances
- the extent and timing of subordinated unsecured debt if used
- the tenor of the related party debt
- currency of the debt
- timing of payment or crediting of interest and remittance of interest withholding tax where applicable
- repayment terms and conduct of the parties
- the overall quantum of interest deductions gives rise to a transfer pricing benefit
- project budget / feasibility and project profitability / commercial reasons for losses.
Taxpayers are encouraged to:
- explain and provide evidence to support the source of the funds and the commercial rationale for their funding arrangement, including what options were realistically available to them at the time
- at various stages during the particular project’s life cycle, and when circumstances change
- demonstrate how their approach was consistent with the arm’s length principle for each reporting period.
We are encouraging such taxpayers to improve their compliance approach by:
- adopting behaviours consistent with keeping their cost of capital as low as possible having regard to the commercial objectives
- paying attention to income tax compliance, including transfer pricing by adopting arm’s length terms and conditions and documenting the substance of their related party financing arrangements
- monitoring their funding arrangements including when circumstances change
- ensuring interest withholding tax obligations are met and reported on a timely basis including annual reporting
- paying greater attention to lodgment and disclosures required in the International Dealings Schedule, including those for thin capitalisation
- continuing to monitor developments in the law and public advice and guidance to ensure ongoing compliance.
Current focus
The private wealth related party financing risk cluster recently commenced planning development of external guidance for private groups that operate in the property and construction industry and are currently considering how best to provide useful external guidance to raise awareness and communicate our expectations and concerns.
We welcome members’ thoughts on what you would find useful as guidance via the programs email PrivateWealthInternational@ato.gov.au or the secretariat.
We also welcome the opportunity to discuss your experiences of financing in the property and construction industry further.
If you are interested in being part of a small working group as we develop guidance, please advise the secretariat of your interest.