Property Options.

okay folks - i'm still getting emails off my property options comments from WAAAAAY back in 2007, so i thought i'd clear it up.

1) I don't hate Mark Rolton. As much as he's tried to find me on FB and used scouts to debunk my posts, the point is there is another way to secure land and it doesn't involve options contracts thick enough to knock and old lady out.

2) No, options aren't a scam. Options and "Joe Average" don't mix - but they're not a scam.

3) WA Vendors and Agents are not a fan of promoting or accepting options contracts.

4) The Duties Act of 2008 (WA) allows you to buy a property in a Unit Trust. You can then sell the shares of that trust to another party and only pay stamp duty on the value of the Units sold, not the value of the entire contract again because the end purchaser's name or entity (the unit trust) hasn't changed. Apparently this is valid for transactions up to $2.5m but I am clarifying this further.

See here > http://www.aar.com.au/pubs/tax/fotaxmay08.htm#Dutie

Transactions to which exemption can apply

There are two types of transactions to which the exemption can apply:

> A 'relevant consolidation transaction'. This is, broadly, directed at the situation where an entity (the head entity) acquires at least a 90 per cent interest in another entity (the affected entity) and issues shares or units to the holders of shares or units in the affected entity in proportion to their existing holding of shares or units. A transaction is not eligible for relief if, immediately before the acquisition, the head entity held dutiable property, a vehicle or an interest in a corporation or unit trust. According to the Explanatory Notes, this is to prevent the exemption from applying to transactions that result in property that would otherwise attract duty coming into the family.
> A 'relevant reconstruction transaction' between entities that are at least 90 per cent related (or are members of a stapled group). This includes a number of dutiable transactions, including a transfer of, or agreement to transfer, dutiable property between group members and an acquisition by one group member of an interest in another group member, if landholder duty would be chargeable.

An application for exemption must be made within 12 months after the date of the transaction. There is also provision for seeking a pre-determination in advance of the relevant transaction.

A transaction that otherwise satisfies the requirements for relief will not be granted an exemption if any member of the corporate group has an outstanding tax liability.

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5) This is similar to an option. You can sign a standard O&A with a Unit Trust as the purchaser with a long Due Diligence period. You pump money into a DA across the site (as per he option route) and instead of selling the option for value, you sell the Trust's Units for value. The Unit Trust still purchases the land but the shares of said trust have changed hands.

6) REA = happy (O&A on table)
Vendor = happy (deposit plus standard O&A on table, no ambiguous options contracts)
You = happy (no double stamp duty)
ATO = happy (operates inside legislation)

For god's sake, check that this applies to your situation before going out on a limb and purchasing a site with a Unit Trust. There is a very specific way it needs to be set up and no, I won't be giving away that kind of information because I am neither a practising accountant, a lawyer nor do I hold an AFSL.

I am merely pointing out a way to possibly use current duties legislation to get around the double stamp duty issue, the obvious caveats are your individual circumstances and the ATO's flavour of the decade - "intent".

This is a work in progress and I will update this thread as more information comes to light.

Oh and please - no more emails about it. Keep it to the thread so everyone can enjoy the brainstorming benefits.

Freeware FTW.
A.

Hi Aaron

Thanks for sharing that. Much appreciated.

Cheers, Paul

you're welcome.

Aaron
The main benefit of options over your proposal is the purchase is "optional" with an option agreement. My reading of your unit trust proposal you appear to have committed to the purchase, is this correct? Can you pull out?
If you don't obtain the necessary DA approval to bring up the site to its highest and best use, to create enough additional value and make the project stack up your stuffed.
Property options may not be main stream and less familiar but can work for all parties.
1. The sellers can be offered an above the current market price and not need to pay for or prepare their own DA to achieve this price.
2. The option holder, if they have enough skill can ad substantial value to the site in a short time and be paid before completion so they can move on quickly to the next deal.
3 The end buyer (developer) can pay for the option first and use the additional funds that would normally be used to pay a 30% deposit, plus stamp duty towards marketing and agents commission etc. If they sell 70% before the option falls due and the project shows a 30% profit, it is then probable the bank will fund 100% i.e The developer has minimal exposure and no cash in the deal.

The other unique opportunity with options is you can structure the option deal to suite the sellers motivation whilst legally minimising tax i.e If they want to convert the value of the land into an income producing asset i.e units. Then the capital gains for the seller can be minimised on a reduced land purchased price in lieu of a reduced unit sale price. The variations are limitless.

Aaron,

Woudn't the value of the units be the value of the property?

Hi Aaron,

Mate, we have just as much trouble down here in SA trying to educate agents/vendors about options don't worry about that!

Michael A said:

Aaron
The main benefit of options over your proposal is the purchase is "optional" with an option agreement. My reading of your unit trust proposal you appear to have committed to the purchase, is this correct?

No.

Can you pull out?

It's a standard O&A with a satisfactory DD clause.

If you don't obtain the necessary DA approval to bring up the site to its highest and best use, to create enough additional value and make the project stack up your stuffed.

Not really, that's why we do DD before we buy. Remember, i can work out what we can put on it before I put an offer on.....

Property options may not be main stream and less familiar but can work for all parties.
1. The sellers can be offered an above the current market price and not need to pay for or prepare their own DA to achieve this price.

Are you saying you CANT do that with an O&A?
"Hi, I need 12m DD but i'll offer you 5% more for your property to do so."
Can i only do that with an option?

2. The option holder, if they have enough skill can ad substantial value to the site in a short time and be paid before completion so they can move on quickly to the next deal.

That's a short option, and if you'd have ACTUALLY READ my post you'd have realised that the alternative provided allows you to do exactly that WITH a standard O&A.

3 The end buyer (developer) can pay for the option first and use the additional funds that would normally be used to pay a 30% deposit, plus stamp duty towards marketing and agents commission etc. If they sell 70% before the option falls due and the project shows a 30% profit, it is then probable the bank will fund 100% i.e The developer has minimal exposure and no cash in the deal.

Same here - again, you should read before posting.

The other unique opportunity with options is you can structure the option deal to suite the sellers motivation whilst legally minimising tax i.e If they want to convert the value of the land into an income producing asset i.e units. Then the capital gains for the seller can be minimised on a reduced land purchased price in lieu of a reduced unit sale price. The variations are limitless.

Because that's impossible otherwise....? I've been party to deals whereby the land was given in exchange for 3 complete turn-key units, all under a standard O&A.

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i'm not saying options can't be used, i'm saying you can use this strategy for the 95% of times options DONT work or are not accepted.

Terryw said:

Aaron,

Woudn't the value of the units be the value of the property?

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it's my understanding that it doesn't have to be, but if the unit trust is buying the property with cash then i would assume that would be the case.

that's not a question i can answer in whole, i'm partly sure it comes down to your exit strategy and profit splits etc.

Thanks for the reply Aaron.

I was not suggesting what you are proposing cannot provide the same benefits as options can, although the benefits on the surface appear minimal. I would love to be proved wrong, as I will have another creative way of brokering deals to put in the arsenal.

No agents will be interested in selling a property with a 12mth DD period and will not encourage any vendor to accept this. This is also the case with options. Agents want their commission yesterday. I have been and am still an estate agent.

For either type of agreement you will need to source your own opportunities. If the properties are actively listed on the market it is improbable any of these vendors would consider taking it of the market for 12 - 24 mths if they have committed to selling.

There have been some muted changes to the stamp duty regulations that if you enter into a put and call option that some states are trying to have stamp duty payable. Your proposal might be looked at similarly if both parties to the agreement have some rights. If it is just a put option then this proposed change would not have any impact. Maybe a property tax expect can shed some further light on this.

The simplest way to achieve most of this is to utilise the and/nominee clause. The contract price in the contract cannot change or you will have to pay double stamp duty. You can still have a special condition for a 12-mth DD period and rights to apply for a DA approval. A good solicitor can prepare an agreement for the balance to be deposited into their trust account prior to settlement as payment for the planning permits, agents commission, advise etc. Contract exchange hands at the original price. Everyone understands the documents.


p.s A short option is when you sell prior to the DA approval. Long is when you sell after you have it.

Michael A said:

There have been some muted changes to the stamp duty regulations that if you enter into a put and call option that some states are trying to have stamp duty payable. Your proposal might be looked at similarly if both parties to the agreement have some rights. If it is just a put option then this proposed change would not have any impact. Maybe a property tax expect can shed some further light on this.

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In NSW, if you enter into a put call option and then assign it to a third party stamp duty could be payable on the transfer of the dutibale property concerned.

I didn't think you could use the and/or nominee clause in Western Australia without facing double stamp duty either?

Michael A said:

The simplest way to achieve most of this is to utilise the and/nominee clause. The contract price in the contract cannot change or you will have to pay double stamp duty. You can still have a special condition for a 12-mth DD period and rights to apply for a DA approval. A good solicitor can prepare an agreement for the balance to be deposited into their trust account prior to settlement as payment for the planning permits, agents commission, advise etc. Contract exchange hands at the original price. Everyone understands the documents.

Click to expand...