Some surprises are welcome but, generally, tax shocks are not! To avoid nasty surprises, planning and obtaining the right advice is vital, whether you run a new and growing business or a more established organisation.
In keeping with the infrastructure theme of this month’s edition, it is timely to look at some of the ways in which tax can affect the outcome of such projects. While tax should never be the main driver in business decisions, it is important to be aware of the tax consequences of various options in relation to a project.
The first thing to consider is the structure, especially if the project will be a joint venture with other partners. When thinking about structure, factors such as limited liability, flexibility for future changes in ownership (such as bringing in new investors) and how any profits can be extracted at the end of the project are important.
Limited partnerships and unincorporated joint ventures can be useful vehicles in many regards, especially when partnering with other entities with a different tax profile, including charities, Māori authorities or government bodies.
This is because their income flows through to each of the parties and is taxed (or not) at their own tax rate, as opposed to using a company structure where profits are taxed at the company tax rate and only the after-tax profits are available for distribution to the shareholders.
Next, consider the income resulting from the project – is it income from rental or use of the assets created or are those assets being created for sale?
Remember that anything bought, built or developed for sale is generally going to be taxable on sale.
If there is government or other funding available for the project it is also important to understand whether this is taxed or not and whether it impacts the value of assets constructed.
Another key factor is the GST treatment of the project. For many projects this will be relatively straightforward and the income and expenses will be subject to GST. Where GST can become complicated, however, is in relation to housing developments.
The provision of residential accommodation is GST exempt so, while the rental income is not subject to GST, it also means that GST cannot be claimed on costs related to developing, buying or providing that accommodation.
Certain models for providing accommodation – such as build to rent, rent to own, shared ownership and leasehold developments – all have some non-standard GST profiles which need to be well understood at the project design phase so modelling can be completed accurately. Seek specialist advice if you are considering these types of projects.
Finally, I would like to acknowledge and celebrate the local businesses rewarded for their hard work in achieving exceptional growth with a ranking in the 2024 Deloitte Fast 50.
My congratulations go to Rice Rice Baby, Hiko Electrical and also to Pinnacles Civil, which was recognised as the fastest growing services business in the Central North Island. The national rankings for the Fast 50 and Master of Growth will be announced on November 20.
