Correct legal structure for property developments

[Feradd]

Hi All,

I'm investigating what is the best structure to use to carry out small property developments of say a duplex or 3 to 4 units.

Please correct me if 'm wrong but from my understanding a development within a family (say husband and wife) should be using a corporate trustee ATF a discretionary trust. Is this the correct structure to use in this scenario? I'm sure there's people out there who have done such property developments in their personal name but is this a real risk if something goes wrong?

The main reason not to do such a project in your own personal name (again from my understanding) is for asset protection in the event of being sued. See my list of pro's and con's.

Pro's
Asset protection (but no protection from the lenders in the event of being unable to meet debt obligations)
Ability to distribute funds to lowest income earner


Con's
Set up costs
No threshold for land tax
Unable to distribute losses
More paperwork when it comes to borrowing

I'm sure I'm missing other pro's and con's in this list so if anyone knows of more can they please add to them.

Many Thanks

 

[Terry_w]

Its not that simple I am afraid.

A trust is a complex legal arrangement between 2 or more people. Whether it gives any asset protection will depend on the type of trust, the terms of the trust and how the trustee conducts business and how the people involved conduct themselves.

There is no correct way of doing a development either. It all depends.... (on many things). Someone came and seen me last week re a small development and I recommended that he do the proposed development in his own name.

So it is not a matter of saying 'discretionary trust' as this is a broad concept not a specific structure (its like saying you should eat chinese food - what dish? And what ingrediants and how it is cooked is important - just thought of a potential TV show - Master Trust showing 6 different lawyers who are given a development proposal and are asked to come up with a structure - all would be different)

 

[LoneWolf]

Its not that simple I am afraid.

A trust is a complex legal arrangement between 2 or more people. Whether it gives any asset protection will depend on the type of trust, the terms of the trust and how the trustee conducts business and how the people involved conduct themselves.

There is no correct way of doing a development either. It all depends.... (on many things). Someone came and seen me last week re a small development and I recommended that he do the proposed development in his own name.

So it is not a matter of saying 'discretionary trust' as this is a broad concept not a specific structure (its like saying you should eat chinese food - what dish? And what ingrediants and how it is cooked is important - just thought of a potential TV show - Master Trust showing 6 different lawyers who are given a development proposal and are asked to come up with a structure - all would be different)

Terry, obviously a trust is recommended when it comes to development, as the liabilities would be upon the trust and tax benefits to the individual

 

[Ausprop]

often there is a separate trust that contracts the builder and acts as project manager as well

 

[LoneWolf]

often there is a separate trust that contracts the builder and acts as project manager as well

This separate trust can be yourself, as the owner of the property. Am i understanding this correctly?

 

[Ausprop]

This separate trust can be yourself, as the owner of the property. Am i understanding this correctly?

well many different ways to skin a cat but I think you would have a separate disc trust with corporate trustee, as the litigation usually centres around construction. the proj manager then takes a fee and then you need to consider the stock values, which trust is a trading trust and which one is a passive investment trust etc.

 

[MTR]

I recently changed accountants who is also a developer, I asked similar question some time ago now, this is his reply and my structure, which may be helpful, of course you situation may differ so check with your own accountant.

"Yes, I am FULLY AWARE that you are intending on keeping some properties and selling some properties?.This is why I am suggesting that you keep the development purchases in the trust. I am also aware that you may sell properties to assist with cashflow for the next developments, this is why we are also going to create a Project Management Company so that we can reduce the tax payable in any one year to a company tax rate whilst rewarding you for your services via a salary from the company.

So you will have Two (2) entities

1. The Trust purchasing the land for development
2. The company which will perform the project management and property management functions of your business and rentals


The newly setup project management company will contract its services to the land holding trust?..the company will register for GST
The land holding trust will develop the site, pay builders costs and pay the project management company during the development. The Trust will register for GST and may have CGT and GST to pay on the sale of the properties.
Once all the properties are built, some may be sold , some may be retained?.BY THE TRUST?.the ones retained will stay in the trust until sold or transferred to another entity of your wish?.should you want to protect your assets further.

 

[LoneWolf]

I recently changed accountants who is also a developer, I asked similar question some time ago now, this is his reply and my structure, which may be helpful, of course you situation may differ so check with your own accountant.

"Yes, I am FULLY AWARE that you are intending on keeping some properties and selling some properties?.This is why I am suggesting that you keep the development purchases in the trust. I am also aware that you may sell properties to assist with cashflow for the next developments, this is why we are also going to create a Project Management Company so that we can reduce the tax payable in any one year to a company tax rate whilst rewarding you for your services via a salary from the company.

So you will have Two (2) entities

1. The Trust purchasing the land for development
2. The company which will perform the project management and property management functions of your business and rentals


The newly setup project management company will contract its services to the land holding trust?..the company will register for GST
The land holding trust will develop the site, pay builders costs and pay the project management company during the development. The Trust will register for GST and may have CGT and GST to pay on the sale of the properties.
Once all the properties are built, some may be sold , some may be retained?.BY THE TRUST?.the ones retained will stay in the trust until sold or transferred to another entity of your wish?.should you want to protect your assets further.

If properties are held under a trust, one of the cons is that apparently negatively gearing does not come into effect?

 

[Terry_w]

Terry, obviously a trust is recommended when it comes to development, as the liabilities would be upon the trust and tax benefits to the individual

Not so simple. A company may be better for a few reasons - easier to carry forward any losses, profits can be retained, legally less complex, easier to transfer interests etc etc.

A trust is not an entity but a relationship so any liabilities fall upon the trustee any tax would be, generally, payable by the recipients of the income.

And when you say 'trust' what does this mean - even discretionary trust - this is not something like a company but a complex relationship with the terms varying considerablly from one 'trust' to another.

 

[LoneWolf]

Not so simple. A company may be better for a few reasons - easier to carry forward any losses, profits can be retained, legally less complex, easier to transfer interests etc etc.

A trust is not an entity but a relationship so any liabilities fall upon the trustee any tax would be, generally, payable by the recipients of the income.

And when you say 'trust' what does this mean - even discretionary trust - this is not something like a company but a complex relationship with the terms varying considerablly from one 'trust' to another.

So for a small property developer / investor, you would recommend a company instead of been a discretionary trust?

 

[Aaron_C]

So for a small property developer / investor, you would recommend a company instead of been a discretionary trust?

Both. Company as corporate trustee for a family/unit trust. Don't get too hung up over it though....most important thing is to make money.

 

[LoneWolf]

Both. Company as corporate trustee for a family/unit trust. Don't get too hung up over it though....most important thing is to make money.

So similar structure as MTR above?

 

[sanj]

So similar structure as MTR above?

honestly if youre actually going down this road you need specific advice for your situation and not SS opinions.

 

[Aaron_C]

So similar structure as MTR above?

I don't know whether MTR's structure is suitable to you but leave the structuring to the side for now. Focus on whether you can identify ways to make money through development instead.

 

[Terry_w]

So for a small property developer / investor, you would recommend a company instead of been a discretionary trust?

ha ha. Depends on the circumstances. if using a trust certainly a company as trustee.