In this guest blog, Business Concepts Group director Chris Reed talks about mistakes to avoid when structuring your property development projects.

There are a number of common mistakes that can be made in the structuring of any development.

The first mistake is not seeking advice at all, or not seeking advice early enough in the acquisition process. The potential for incurring unnecessary tax and stamp duty (potentially hundreds of thousands of dollars) should be enough for all developers to seek professional and specialist advice from the outset, to ensure the project is structured correctly.

The second mistake is not using specialists. You need to get expert advice from a professional that understands property development. Primarily a development team will consist of builders, architects, town planners, engineering, etc (the actual team in producing the development). But that development team needs to be expanded. It needs to include accountants and advisors, lawyers, finance specialists, even equity raising specialists. When engaging with these professionals, you need to make sure that there is specialist expertise in property development and that they are not just a ‘jack of all trades’.

The third mistake we see around property development structuring is that there is ‘no cookie cutter solution’. There are no templated answers to the question “what structure should I use?”. Every development can be different, so we need to make sure that structure advice is obtained for each development. The type of structure that was used for the last development may not work for the next one. A new entity, or special purpose vehicle (SPV) should be setup for each development.

Key factors to consider when looking at our structures.

Asset Protection

We need to make sure that we’ve protected the assets that you have acquired to date, that we have protected the project as best we can, and to ensure that any profits from the project can be moved into a protected entity.

Taxation

The taxation of profits from a development can vary widely and this is all driven by the structure. From top marginal tax rate at 45%, the corporate tax rates of either 30% or 25%, or potentially even the superannuation tax rates of 15% or even tax free.

Project outcomes

What are we trying to achieve with our project? Are we building and selling them all? Are we going to sell some, keep some? Are we keeping them all to rent out? Maybe we want to keep one as a principal place of residence. Or perhaps a combination of the above. The project structure needs to allow for the desired outcome, and be flexible enough to allow for different combinations without incurring unnecessary stamp duty, income tax and GST.

Project funding

The structure needs to be able to allow for the funding requirements of the project. The project will be funded from two areas: debt and equity. Will we be bringing in investors/partners (equity)? Will we be borrowing (debt)? Is it a combination of both? Certain structures allow you to bring investors or partners in and provide equity, certain structures don’t. It is really important that developers understand the funding of their development and understand the debt versus equity components.

The structures that you use for your developments are critical. They determine how much asset protection you have, what the taxation outcomes will be, and the options around funding the project such as the ability to bring in investors or partners.

Structuring discussions should take place with an adviser (with specialist property development knowledge) before a contract is signed.