Brain knotted....How would you do this?

My brain is going round and round without getting good answers….Any ideas??

My story is I own two blocks side by side. One block I developed with four villas which I have held and rent out (not strata titled) Next door block has old house which is to be demolished and DA has just come out for nine two storey townhouses which will share the driveway with the four villas adjacent. These I will strata title.

Plan is to do a joint venture type arrangement with son-in-law who is the builder and my intent is to hold five of the townhouses and rent them out while son-in-law takes four.

This is where it gets tricky. We each have some equity in other properties enough to fund approx two thirds of the project but need to borrow against the land &/or project to get remaining funds (which I am working on).

I can’t get my head around the ownership issues and CGT and GST.

Have considered trusts, companies etc and would prefer to keep it simple as possible while minimising taxes. Latest plan is for me to sell the block to a partnership that we create together, so the partnership can borrow against the land/project.

We’ll both contribute 50:50 to the partnership and the project and split any profit. The sale of land to the partnership and then the sale of the five completed townhouses back to me and the other four to son-in-law would both be CGT events as far as I can work out so would I be paying CGT twice??

Also Stamp Duty to pay both times. As far as GST goes I’m getting completely knotted…I’m not registered for GST, son-in-law is, partnership would be, new residential properties selling from partnership back to us, but land really was mine anyway in the first place, and I’m holding them and renting!??...

Then there is the borrowing the funds to build, then having funds to buy back off the partnership and paying off the original loans and ending up with five townhouses with loans about 60%LVR. Or is the sale back to me just done on paper??...more knots…

Anyone have any thoughts? I just want to realise the asset in the simplest and best way possible and end up keeping as much of it as I can i.e five townhouses, maybe sell one or two down the track if and when I need to.

Is there a simple model I can follow while minimising costs??

Any ideas appreciated.

Andy
 
Good morning Andy,


No-one seems to want to touch this one with your 10' barge pole, so it looks perfect for me to chip in with my 2c worth.


Let me rightly understand your current position regarding this sole title....

1. You own the land outright.
2. You and the SIL have enough funds to develop 6 out of the possible 9.
3. You need a loan to fund the other 3.
4. You will be apportioned 5, and the SIL who is going to build them, gets 4.
5. You'll probably keep yours and he'll probably have to unload most of his.


To minimise all of the CGT events and keep it as simple as possible, I would develop the block solely in your name, and draw up a separate binding legal agreement entitling the S-I-L to protect his interests....and yours.


If everything is done in your name, then no CGT event occurs until the final moment when you strata the nine townhouses and sell 4 to S-I-L. The land itself and the 5 townhouses you are allocated avoid CGT altogether. IMO, it would be fair to split the impost of the CGT on the 4 townhouses as 5/9ths to you and 4/9ths to the S-I-L.


The loan, to obtain funds for the 3 townhouses you don't have, would be taken out in your name only, supported by a guarantee from your S-I-L. At this point you've just introduced a third party, and they are going to insist of having it their way....be careful right here.


In my mind, the only tricky bit comes from apportioning value of the townhouses once built. You can always get a porfessional valuation done, but then where do you draw the line, cos the S-I-L presumably would have built all nine for considerably less cost than what they are worth once completed. This is the value add component he brings to the project.


His raw material costs can certainly be nailed down, but not his time and expertise. Your input cost, the raw land, can easily be valued and apportioned. You'll have to agree up front what his added value is worth.


I think it's a wonderful opportunity for your and the S-I-L to really forge ahead, and if fully agreed and signed up, upfront, there is no reason it cannot be a real cracker for the whole family.


Most importantly, what does your wife think of the whole scenario ?? I'm sure your daughter is as keen as mustard, but what about your missus ??


Good luck with it Andy, and hope that helped a bit. :)
 
Hi TPFKAD,

Thank you for your input. You have summed it up very succinctly… much clearer than I could have.

I like your ideas. Keeping it in my name and having a separate binding legal agreement to protect each person’s interests seems a good plan.

You are right in that getting the last of the funds and having that lender in there wanting to protect their interests I will need to be careful. In discussions so far with NAB they certainly want to protect themselves.

Agreeing S-I-L’s added value and apportioning values is tricky but I think we will be able to work through that.

I’m still uncertain on GST issues though. If I’m developing the block solely in my name I guess I would be contracting S-I-L’s company to build them. That company would pay the bills and claim input tax credits I presume, then S-I-L and I would pay that company half the costs each? When I sell 4 competed townhouses to S-I-L there would be GST to pay?

We are lucky that the girls are all with us on this, yet it is a bit daunting as it is the largest thing we’ve ever done so far. I think we should get a good outcome in the end though.

I’ll throw all comments into the pot and stir it around a bit more – meeting with accountants & advisors next week. Will keep you posted how it turns out.

Thanks

Andy
 
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