Bought house with brothers - tax stuff

[GaryT]

Wow - you have gotten yourselves into a bit of a pickle.

When you get in front of your good cheap accountant (not me) here are some things to discuss:

1. You have purchased the property in the names of one brother and his wife, but you want to distribute profits among the 3 brothers. Generally speaking income from property is split as per the title holding. So how do you tax effectively get the profits out to the 3 brothers?

2. You have indicated that this is purely a business venture - to subdivide and sell. As such is is an enterprise for GST purposes and you may be required to register for GST and GST may apply to at least to the sale of the new house because it is classed as a "new residential premises". The existing house (fairly obviously) may not be classed as a "new residential premise" and so may not be liable for GST. Can you take advantage of the "margin scheme" etc? How is this GST managed?

3. Again because it is a once off business venture and not merely realisation of a capital asset, capital gains tax does not apply. It is purely a nbusiness venture. Therefore all profits will be taxable at normal rates with no CGT discount applying. As per question 1, how can this be done tax effectively?

Now if you meant to say that you will be doing this project as a future investment and will be holding the properties for rental for a period of 5 years or so, then all of the tax issues change dramatically.

That good expensive accountant is going to seem mighty cheap me thinks!

Now here cometh my rant. You have a project of over $1M which will include professions which you will not quibble about such as engineers and architects with charge out rates in excess of $500 per hour. But the one professional who has the potential to provide you with the greatest profit return on investment is your accountant. You have already probably cost yourself huge amounts because you did not get in front of an accountant before you signed that contract. Your choice but I know what I would do.

 

[daniel cunningh]

Thanks Tillie and Garry,

Point taken.

Yeah we made an error not getting advice before we purchased.

It sounds as if we have made an error not setting up a trust for this purchase. As it has not settled yet are we able to set up a trust and alter names on the contract of sale if this would be beneficial?

Alternatively:

Would it be possible for my brother and wife whom the loan and property is under to move into the established house (obviously with the intention of it being their PPOR), live there for one year whilst the new build and subdivision takes place, then sell the established home (no CGT applies as it was PPOR?) move into the new house with the intention of this being their PPOR, live in the new house for 6 months then sell (no CGT applicable as it was PPOR?)

Alternatively, Terry is your office in Sydney?

Cheers

 

[GaryT]

Contact your solicitor for advice on changing the purchaser entity.

Contact an accountant for advice on the structure issue and alternative tax scenarios.

The message is it is OK to pay for good advice. My feel is that it is not the role of this message board to give in depth free advice but rather to assist with what questions to consider when getting that paid advice.

 

[Paul@PFI]

Lessons in Structuring

Daniel

I appreciate my reply is coming in a bit late and some great guidance has already been given. But there was something missed.

In my experience with builders, investors, developers etc there is one aspect that is often considered late but it should be considered first. That is "STRUCTURE". Getting it wrong can impact on simple things like share of ownership, taxable income and even risk of the property itself. Your example is quite typical so don't be too concerned. I see clients frequently who find out months later or years later.

My 2 cents is ...
1. The property should be acquired by a seperate "entity" to that of the builder. I call this the OWNER and the BUILDCO. I say entity as it shoudn't be owned by people.
2. Ownership of the property by individuals should be avoided at all costs. Imagine if your bro-in-laws wife took him to the cleaners...She wants her share of that property too. What happens if someone dies ? Depending on state you are in a fixed trust may be suited as it allows the underlying "ownership interest" to be changed without stamp duty issues. In QLD other options are available. Fixed trusts ensure each "owner" has a fixed slice of the pie rather than some loose promise.
3. The construction should be performed by a sacrificial BUILDCO. A company is usually best. No partnerships please. If the project is a financial flop you want all the problems confined to that company NOT the property and NOT its owner/s. I said sacrificial as if it all goes pear shapes and loses $ the company can fold and the Directors aren't liable unless they traded insolvently. If the project looks shaky run to a guy like Terryw for early advice.
4. There are many aspects of this structure I havent shared.

The above should be capable of a experienced accountant who will also need to look at the GST issues too. My friend Mike is 100% correct - Its all income and there is no CGT issue here. Sadly few understand property / development and such and often provide very outdated advice. Your accountant should also be able to guide on using SMSF financing strategies too. They can be strict rules but if one or more SMSFs can own the property it may free finance solely for construction. There are countless ways this can be structured and a costly SMSF borrowing avoided.

If I were loooking I would consider myself, House of Weath or Nick Moustacas (Strategic Wealth) as knowledgable. Tip : Steer clear of anyone who wants to sell you "their" trademarked trust.

Paul

http://www.pricefinancial.com.au/taxation

 

[Terry_w]

Alternatively, Terry is your office in Sydney?

Cheers

Yes, I have an office in the CBD.