Buy IP in own name or through company?

[vaughan]

Hello Team Somersoft!

I have an opportunity to purchase an IP using some cash and mostly equity from my PPOR, no bank loan involved. My intention is to renovate, rent for a period of time, then sell. The rent period depends on market conditions and possible tax advantages from holding. There is a possibility that the block can be split in half and subdivided but the numbers work even if this does not happen.

The work will be done through my company, and profits will go to the company. Should the property be bought in my personal name, or through the company? What are the implications for GST (the company is registered for GST) and for capital gains tax: does the 50% reduction in CGT for 12 month holding apply to companies?

Many thanks.

 

[Brady]

Hello Team Somersoft!

I have an opportunity to purchase an IP using some cash and mostly equity from my PPOR, no bank loan involved. My intention is to renovate, rent for a period of time, then sell. The rent period depends on market conditions and possible tax advantages from holding. There is a possibility that the block can be split in half and subdivided but the numbers work even if this does not happen.

The work will be done through my company, and profits will go to the company. Should the property be bought in my personal name, or through the company? What are the implications for GST (the company is registered for GST) and for capital gains tax: does the 50% reduction in CGT for 12 month holding apply to companies?

Many thanks.

Can't comment on the CGT GST accounting stuff...

But why use your own cash (or businesses) in my mind cash is kind especially if you're planning to do a subdivision. It's always easier to get money at the start when you don't need it rather then scramble later on when you realise you need it. If possible I would look to borrow the funds and place your cash in the offset, that way you don't pay any extra interest but have the flexibility of using the cash.

Often people make huge errors in paying cash and running out, especially with developments. And if it's your companies cash why would you want to tie it all up in one development, what happens if something doesn't go to plan in either the development or other parts of your buisness.

 

[vaughan]

I didn't say the cash was mine. Most of the purchase is through equity.

 

[Peter_Tersteeg]

Ownership via a company structure is usually a huge mistake. There's little flexibility and the tax benefits are fairly awful.

You really need to talk to your accountant and get specific advice, but for the path you're thinking along, a trust with the company (and probably yourself and your family) as the beneficiaries is almost certainly a better ownership structure than a company.

 

[Cargs]

Hello Team Somersoft!

I have an opportunity to purchase an IP using some cash and mostly equity from my PPOR, no bank loan involved. My intention is to renovate, rent for a period of time, then sell.

If you intend to sell would you better to rent first, renovate after then sell freshly reno'd? Or does the place require a Reno to make it rent-able?

 

[GaryT]

Consider purchase through a corporate trust.

Then get the company to contract with the trust for the building work for separation.

Trust MAY be able to access 50% CGT discount - company cannot.

 

[Aaron_C]

You wouldn't do it through a company due to the mediocre tax treatment plus the potential for GST charged (for renovating a house so much that it becomes 'new' for GST purposes).

 

[Terry_w]

Purchasing in a company has merit - especially if the land is in NSW as the company will get its own land tax threshold. Shares could be held by a discretionary trust. There is no 50% CGT discount but depending on what you are intending to do the profits may not be classed as capital gains.

Just don't do it in a trading company with other assets..

 

[coastymike]

Given the intention is to buy renovate and sell it sounds like a profit from an isolated transaction which will be taxed on revenue account and capital gains tax wont be applicable. Therefore a company wouldnt be a terrible proposition. Few reasons why

1. Company gets land tax threshold.
2. Tax rate capped at 30%
3. If shares held by a discretionary trust good asset protection and ability to stream dividends tax effectively.
4. No division 7a is funds lent from company a to company b and company b does a future development.

 

[willy1111]

Given the intention is to buy renovate and sell it sounds like a profit from an isolated transaction which will be taxed on revenue account and capital gains tax wont be applicable. Therefore a company wouldnt be a terrible proposition. Few reasons why

1. Company gets land tax threshold.
2. Tax rate capped at 30%
3. If shares held by a discretionary trust good asset protection and ability to stream dividends tax effectively.
4. No division 7a is funds lent from company a to company b and company b does a future development.

Coasty Mike/Terry,

If he did the buy, reno, sell in a company is there any reason he shouldn't use the same company to do it again with another property in the future.

Cheers

 

[Terry_w]

Coasty Mike/Terry,

If he did the buy, reno, sell in a company is there any reason he shouldn't use the same company to do it again with another property in the future.

Cheers

He could repeat if he wants. The company would still have to pay tax on any profits though.

 

[vaughan]

Purchasing in a company has merit ...
Just don't do it in a trading company with other assets..

ATM the company owns a car and some office equipment, and borrowed money to purchase everything. Would this still be a bad idea?

Coasty Mike/Terry,

If he did the buy, reno, sell in a company is there any reason he shouldn't use the same company to do it again with another property in the future.

Cheers

He could repeat if he wants. The company would still have to pay tax on any profits though.

That's my intention: rinse and repeat. The intention is to get some income and profit into the company so we start borrowing. IMHO paying tax on profit is a good problem to have.

 

[Terry_w]

ATM the company owns a car and some office equipment, and borrowed money to purchase everything. Would this still be a bad idea?

Depends. If company has an existing loan then there is added risk.

 

[vaughan]

Thanks for the replies, folks.

Unfortunately my accountant is on holidays and I am in the "verbal offer accepted" stage of buying this property. Building and pest inspections happening this weekend.

I don't want to make a big mistake, but I can live with being a bit sub-optimal (if you know what I mean). It's intended to be a 6 to 9 month project from buy to sell so I will probably buy in my name, renovate through the company, sell in my name.

Any major problems doing this?

The renovation is going to be big and I have been reading up on the GST effects of a "substantial" renovation. It's a kitchen+bathroom+laundry renovation, with a new family room out the back. It might just squeak in under the "substantial" radar because I am not making many changes to the main part of the house.

 

[Scott No Mates]

Your biggest hit Vaughan will be CGT as you aren't going to be holding the place for 12 months to qualify for the 50% discount (assuming that you are in the highest tax bracket).

Why not consider using a new company (ie not tied to your existing company)?

 

[coastymike]

CGT wont apply even if he did hold it for more than 12 months. It is a new purchase and intention is to renovate and sell. That sounds like revenue to me. Not like an existing investment property held for 10 years and then the same thing is done and that then probably classifies it as a mere realisation of a capital asset and in the cgt net.

 

[coastymike]

This private ruling provides a good example of the fact that in many cases properties purchased with an intention to renovate and sell are on revenue account. In this case a loss occurred and so the loss is deductible. If a gain had occurred it would have been income and not subject to the capital gains tax regime.

http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/71759.htm

 

[Rob G.]

The renovation is going to be big and I have been reading up on the GST effects of a "substantial" renovation. It's a kitchen+bathroom+laundry renovation, with a new family room out the back. It might just squeak in under the "substantial" radar because I am not making many changes to the main part of the house.

Even if not dealing in new land ... if it is a purchase for resale at a profit even as a once-off (see Mike's post) then it could be an enterprise for GST purposes.

 

[vaughan]

Even if not dealing in new land ... if it is a purchase for resale at a profit even as a once-off (see Mike's post) then it could be an enterprise for GST purposes.

I'm not sure what that means. Is it: if buying and selling houses is done as a business then the profit is treated the same as any other income, and not specifically CGT.

How does GST work?