We are two families who want to develop our own properties for long term investment. The plan is to by a land, develop say 8 units, sell 6 of them to pay back the borrowings and our initial capital and keep 1 each for long term investment. Then move to next project and repeat it again. I was wondering what the best structure is in terms of minimizing the tax and protecting the assets we build.
I was thinking of following option:
a) Family discretionary Trust A and Family discretionary Trust B borrow say 90% money from bank and buy the land.
b) They enter into a JV agreement with development Company C (which has the same people as directors) to develop the land and share the final product where Trusts A and B each keep one unit each debt free or with minimal debt and Company C sells the remaining units to make its own profit.
c) Company C registers for GST, pays all the consultants invoices, obtains development approval, borrows construction funding using land as security, engages a builder and manages the process through the completion.
d) Upon completion, Company C sells all units except two, pays back the all borrowed money including construction funding, debt on land, Trust A and B cash contribution and his own contributed money and pay 30% tax on the remaining money left as profit.
e) Company C pays GST on sale of all sold units
f) Trusts A and B keep one unit each in their own name.
1) Is there any way that when they obtaining new titles, they transfer say unit 1 in Trust A name and unit 2 in the name of Trust 2 without paying stamp duty on transfer?
2) Do Trusts A and B have to pay CGT if they are holding new units as investment properties?
3) When claiming GST input during project, can Company C claim 100% GST input or it just can claim (Total units-2)/Total units percentage of GST?
4) If the directors of Company see are some of beneficiaries in Trusts A and B, does it create any tax issue?
5) If we repeat above process for many projects so firstly we create our own investment properties with minimal debt and hold them in our family trusts and secondly we make profit by our development company:
a. Is above arrangement is considered a true JV?
b. If someone claims anything about developer of the project later on, does it affect Trusts A and B?
1) When you initially buy the property if you buy the land in company name (say with you all as directors) you can set up your trusts underneath that company ie have the company as trustee. Then if you roughly know which house/unit you would each be getting.. say off a site plan you marked each house a b c d e f g etc. You can then allocate that property to that trust. Ie .Property A is going into Trust A and Property B is going into Trust B and the rest are being sold. A good Conveyancer or lawyer would know it as a Acknowledgement of Trust. Bascially this says that you bought this land with the intention to create it for this trust. This avoids the transfer of stamp duty into a long term holding structure like a family trust that gets CGT 50% rule.
2) Trusts would only pay CGT if they sold. And even then you should discuss with a good accountant because there have been cases of people doing developments and selling the properties that they held years later. And the ATO still viewed it as their purpose for entering into the transaction and it was a income tax event and not a realization of capital gains.
3) If you claim GST on properties that you hold… Thats a no no, make sure you only claim gst credits on the properties that are being sold. Claim none for the 2 that you wish to hold.
4) No it doesn't matter if your a director of a company and also a beneficiary of a trust. Ie it could go Director – Company – Family Trust – Individual Beneficiaries.
On the note that you mention about tax.. If your total expenses equal the total sale price of 6 units sold then you technically wouldn't make a profit because you locked it into the other 2 remaining units. Which is a good thing unless you want sales to borrow against in the future.
5) A) A JV would be between say two companies. which if you wanted to keep everything more separate you could buy a piece of land as Joint tenants between 2 companies 50% each.
If you were all directors of the same company then its just a Venture.
b) unless you have done no developments before this most likely would be seen by the ato as a development and not just a Property investor making the best use of his property. And if you intend to Claim gst credits then it almost certainly is a development. A profit generating activity.
If you can keep the land LVR percentage on the initial purchase down to say 80%, the finance on the development construction loan would be a lot easier to obtain as well.
I have seen people buying the land in a company name with allocating preference shares to each investor. So after construction is finished, each get their nominated units as you suggested. I guess the only difference here would be two investors will be our family trusts and the rest would be the company who owns 6/8 of shares and register for GST and sells its nominated units on completion. A good lawyer should be able to draft a shareholder agreement for it.
I am not sure about your point regarding no tax if income from selling 6 units is equal to cost of building 8. I have been advised that tax office sees the profit equal to sale of 6 units minus (6/ of total cost although we intend to keep two units.
If you are operating a company.
and your total costs of developing 8 units is say 2 million 250,000 each dwelling incl land, hardcosts and build cost and interest. If you then Sold 6 units and after gst and sales cost you repaid the full 2 million dollars of costs/loans. Say selling each home at 350k. (100k would cover sales costs and gst component. (2.1mil total)
Your Company then retains the additional 2 dwellings. You have made a net profit that year of zero. Therefore your taxable income is zero.
How your company holds those properties is then up to you, as i said you can allocate those remaining 2 properties to each family trust. As long as you set this up before settlement on the land.
This is why a lot of investors will wait until they are either Not working full time or retired before they sell off properties they have constructed during development.
Or better off Never selling, just keep it forever and live off the rent
Are you sure about it? Based on my accountant advice, just using your example, total cost of development of six units is calculated based on 6/8 of 2 million which is 1.5 million. Total income after selling cost of 100k is 2 million. So the company has made net profit of 500k! which will be taxed.
Sorry mate was actually thinking about something else there before.
Yep so your gross profit would be 500k (83k each house)
Still have to take off all your other costs in running ur busines. Like cars petrol to get to site, home office, mobile, accommodation costs if you have to stay overnight close by.
Say 50k (if there’s a couple families involved you might have 3-4 cars) keep the logbooks
if you trusts own shares in your company the income flows to them.
Then you tax effectively distribute that income to persons with lower incomes. It might be your 2, 18 year daughters at uni earning no money. There goes 50k to them
Leaving 400k And might end up giving the rest to another company at 30 % tax of 400k = 120k tax
Earning 400k whilst only paying 120k tax would be better then most Australians
Then if you might have other investment properties and you could choose to
Pay the interest in advance for those in the same tax year. That’ll chop
It down some more. Or one of you stop working for that year to manage the project and would take a income as a wage. That means up to 80k as a wage until you go over paying net 30%.
Pay business costs for next year in advance as well, buy your next car in under the business name and claim it as a deduction- business expense. Use that money to purchase business assets.
Perhaps designing your houses so that you sell the ones with the most cost base and least profit whilst keeping the ones with the least cost base and most profit.. Ie a 4 bed over a 2 bed.
Perhaps it’s better to keep 4 houses and sell the other 4.
Or to acculamate other assets with lots of deprication to offset any profits you make beforehand. Or offsetting it against any tax offsets that you could of accumulated from losses over the years.
Worry less about paying tax then making money. Paying tax is a party of making money.
Or get smart and if you intend to keep your jobs or business that you run. Create developments were you can hold them all long term. Think furnishing, solar power, government schemes to make your dwellings cashflow positive from the start.
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