allocating apartments to shareholders

[morty]

Hi Guys,

I've got my accountant working on this currently but i thought some fresh and experienced eyes on it wouldn't go astray.

I am currently finishing a development of apartments in melbourne. There are 5 shareholders on the project. We have sold half off the plan through a RE agent and the shareholders are keeping the final 5 apartments.

Now here's what i don't get. We are essentially "selling" the remaining apartments as an off the plan sale to each shareholder. This creates xxx amount in the profit column of which we must then pay company tax on. But it's all our own money, we are essentially selling to ourselves.

I realise everything needs to be above board so we must pay stamp duty at market value. But why can't we simply sell each remaining apartment to the shareholders for a dollar, pay full stamps to the SRO and then not have such a huge tax bill at the end??

Some may see this as a stupid question but i just don't see the point in charging ourselves for something we already own.

Any advice would be much appreciated.

 

[Scott No Mates]

One issue with buying for $1 is when you come to sell and unless it has become your ppor there might be a small matter of cgt to pay.

Also, there's bound to be an opinion on the loss that the company will make if you sell to related parties for $1

 

[morty]

I did think of this Scott but as we are all young we have all thought about moving into them if we thought that we might sell down the track. It is a good point though.

The related parties sale is weird though as we are all shareholders of the company, i can't see how that'd be deemed unethical?

Morty

 

[westminster]

Why wasn't this all sorted PRIOR to starting the development? Each JV partner should have had their own independant accountant advise and an agreement made by the group as a whole.

If you are running a professional company advertising for people to join your ventures - as your website lists - then you need to know these things up front.

 

[Blacky]

Well, you don't own them is the short answer.

I am assuming as you use the words "shareholders" that the development was completed through a company entity - therefore the company owns the apartments not you.

To to transfer it to the unit holders is just that - its a transfer. There are a number of ways that you can do this.

If you attempt to transfer them for $1 - them make them your PPOR the tax office will see this for exactly what it is - i.e Tax avoidance.

You could sell the properties to yourselves, at market rates, pay company tax (30%) on the profits then receive fully franked dividends from the company.

Remember that you set up a company for a reason - that is - so that you don't own the assets (there are reasons for this including risk and taxation). Now that you are complete you cant reverse that structure simply because it better suits you know.
Every structure has pros and cons.

As WM says - this should all have been planned for, and known upfront. Surprising it wasn't given you are selling your services.

Blacky

 

[dan c]

Some may see this as a stupid question but i just don't see the point in charging ourselves for something we already own.

Any advice would be much appreciated.

You don't own them. The company does.

If you sold them for $1, there would be a loss in the company (I'm assuming the cost to build is more than $1) and you would have an extremely low cost base for any possible CGT you may have to pay when you sell.

I'd get a couple of valuations, and use the most favourable (ie lowest) as the selling price. Make sure you maximise all expenses in the company to lower any tax bill.

 

[morty]

Thanks for the answers and feedback guys.

I can understand your points that it shouldve been sorted at the start, as this is what I now do with my company.

This development however was bought when we were all in our early 20s (about 15 yrs ago) and didn't have a clue about property.

Each project we do now is planned to within an inch of its life. We weren't so savvy back then however and i'm simply untangling a very old mess on behalf of my siblings.

Thanks again

 

[Paul@PFI]

There are two CGT rules that your tax adviser should have quickly mentioned.

1. Trading stock disposal rule. There is a CGT event that causes the trading stock to be disposed to each shareholder; and
2. The market value substitution rule which means market value is a must.

You may have some GST issues too. No CGT issues as such since the company disposes of trading stock - A deemed dividend even ???

Charging yourself something for something you already own ?? LOL. The company owned them but the shareholders agreement vests the ownership to the shareholders. In my day we called these sorts of documents contracts. Its disposal of trading stock and CGT acquisition by the parties. So the sale = profit and the company pays tax on it. Unless of course its a dividend that paid for the acquisition. That's a whole different issue.

You didn't look at a partition in the planning stage ?? Or get tax advice ?

 

[Rob G.]

Maybe start at the beginning.

The OP mentions "shareholders" and yet has not clarified the structure:

Joint venturers with corporate manager ?

Unit/hybrid trust with corporate trustee ?

Company holding assets with shareholders contributing expertise, perhaps as directors/employees ?

 

[westminster]

Thanks for the answers and feedback guys.

I can understand your points that it shouldve been sorted at the start, as this is what I now do with my company.

This development however was bought when we were all in our early 20s (about 15 yrs ago) and didn't have a clue about property.

Each project we do now is planned to within an inch of its life. We weren't so savvy back then however and i'm simply untangling a very old mess on behalf of my siblings.

Thanks again

Well I would assume you'd divvy it up the same way as you do with current projects then. But this will be an accountant question due to the age of the purchase, how you structured the construction and how the JV was originally set up.

 

[Terry_w]

Some may see this as a stupid question but i just don't see the point in charging ourselves for something we already own.

Sounds like you don't own the property but shares in a company which developed the property = completely different.

perhaps you could have structured this better so that the costs could have been reduced.

Don't forget GST