Developing and selling for a Profit

[kathyarthur03]

Hi,
I am a newbie who is interested in setting up a company with a friend to develop property and then sell for a profit. I am struggling around the accounting side of things and have seen two accountants who haven't been very helpful. The questions I would like answered are as follows:
1) In regards to the 30% Company Tax, is the 30% applicable to the Profit only after GST has been paid or is the 30% applicable to the sale price?
2) If I do set up a company, once we have our profit, if we were to withdraw the money out of the company, does this get further taxed? And if so at what rate, especially given that we've already paid the 30% company tax?
4) What are the tax differences between doing this as a company or family trust. Which is the most advantageous given that we want the money at the end to spend rather than reinvest.
5) Is setting up a company the smartest tax option, especially given that we want to buy, develop and sell within an 18 month window?
Any assistance or recommendations re a good property accountant in East/South East Melbourne would be greatly appreciated.
Cheers Kathy

 

[Terry_w]

1. GST is separate. 30% is the company tax rate.
2. dividends will be taxed in the hands of shareholders. But there would be franking credits. Wages would be taxed in the hands of recipients.
3. what happened to 3?
4. Trusts are flow through. No tax is payable if the money flows through. Income retains its character. trusts generally don't retain income.

Companies are taxed, income comes out differently - dividends or wages etc. income can be retained.

WHich is better depends on what you want.

5. depends on many things

 

[Paul@PFI]

Hi,
I am a newbie who is interested in setting up a company with a friend to develop property and then sell for a profit. I am struggling around the accounting side of things and have seen two accountants who haven't been very helpful. The questions I would like answered are as follows:
1) In regards to the 30% Company Tax, is the 30% applicable to the Profit only after GST has been paid or is the 30% applicable to the sale price?
2) If I do set up a company, once we have our profit, if we were to withdraw the money out of the company, does this get further taxed? And if so at what rate, especially given that we've already paid the 30% company tax?
4) What are the tax differences between doing this as a company or family trust. Which is the most advantageous given that we want the money at the end to spend rather than reinvest.
5) Is setting up a company the smartest tax option, especially given that we want to buy, develop and sell within an 18 month window?
Any assistance or recommendations re a good property accountant in East/South East Melbourne would be greatly appreciated.
Cheers Kathy

Kathy -

1. Profit is determined after GST is excluded from the sale and the costs incurred. Tax of 30% applies. However it isn't the final tax. Many overlook that issue. The company will initially pay 30%. Thereafter the shareholders may receive a dividend comprising the profit. Shareholders are taxed on that too...However to recognise the 30% tax paid by the company the shares come with a tax credit. For each $100 div the shareholder is taxed on $142..at their marginal rate. Then deduct the $42 already paid. A shortfall of between 0% and 28% occurs. So the final rate of tax on company profits can be far higher than the highest tax rate.

Dividends can be timed to occur in later years in some cases. Tax strategy needs advice.

2. If you try to bypass the dividend issues by borrowing the funds from the company special rules treat this as a "deemed dividend" and no tax credits occur.

3. Two unrelated persons probably cannot use a family trust. Even if they could you both would have no entitlement to profits. You may consider a fixed trust so a fixed share of profit is your entitlement ie 50/50. Just bear in mind unlike dividends you cant choose timing. If the trust makes a huge profit its taxable in that year to the individuals.

The company is one option. Remember that in your proposal there is no CGT. The profit is fully taxable since you goal is to make a profit. A property savvy accountant should be advising alternative strategies and include guidance on structure options, finance methods etc.

If the property is a reno then no GST applies. If its "new" residential then GST may occur. The margin scheme may substantially reduce GST impacts.