Developing apartments - Company structure

[keroppi_gims]

Hi,

I want to ask the experts here what structure is recommended for someone who is developing a small apartment complex for sale.

I am looking to build an apartment complex of 7-8 and sell 5 of the apartments. I want to know what structure I should purchase the land in so that I minimise the CGT upon sale of the apartments. The capital gains will likely amount to over 300k.

A secondary question is what is the main difference between purchasing as a company versus a company as trustee for a family trust?

 

[Scott No Mates]

The company wouldn't pay cgt on the sale it is profit and taxed at the corporate tax rate. The company would also be liable for land tax as well.

 

[Terry_w]

Hi,

I want to ask the experts here what structure is recommended for someone who is developing a small apartment complex for sale.

I am looking to build an apartment complex of 7-8 and sell 5 of the apartments. I want to know what structure I should purchase the land in so that I minimise the CGT upon sale of the apartments. The capital gains will likely amount to over 300k.

A secondary question is what is the main difference between purchasing as a company versus a company as trustee for a family trust?

You imply there is a simple standard answer to such a question.

Differences:
Trust income retains its character. Company doesn't.

Discretionary trust has no fixed entitlement so cannot easily bring in others later. A company can easily transfer shares, duty is generally much cheaper than transferring title.

beneficiaries have an interest in the property of the trust. Sharesholders do not.

Company, no CGT discount. Trusts can get (but unlikely CGT will apply in this situation).

Company gets land tax threshold in most stategs, trusts may not. e.g. NSW

 

[stumpie]

Hi,

I want to ask the experts here what structure is recommended for someone who is developing a small apartment complex for sale.

I am looking to build an apartment complex of 7-8 and sell 5 of the apartments. I want to know what structure I should purchase the land in so that I minimise the CGT upon sale of the apartments. The capital gains will likely amount to over 300k.

A secondary question is what is the main difference between purchasing as a company versus a company as trustee for a family trust?

I am not a lawyer or tax accountant but reading from the more seasoned developers on SS and some books most hold the land in a trust so that if and when they sell the income can be split amongst beneficiaries for tax minimisation. if you are developing to sell then the profit is of a revenue nature and not a capital gain so no 50% discount on the 5 apartments you're intending to sell and you pay GST. For the 2 or 3 apartments you're keeping, if held over 5 years no GST payable and you're likely get a discount for CGT. Terry W can you chime in and correct me if i'm wrong.

 

[+Mpire_Builder+]

You imply there is a simple standard answer to such a question.

Differences:
Trust income retains its character. Company doesn't.

Discretionary trust has no fixed entitlement so cannot easily bring in others later. A company can easily transfer shares, duty is generally much cheaper than transferring title.

beneficiaries have an interest in the property of the trust. Sharesholders do not.

Company, no CGT discount. Trusts can get (but unlikely CGT will apply in this situation).

Company gets land tax threshold in most stategs, trusts may not. e.g. NSW

Options (to just name a few):

If looking to bring others in LATER, potentially consider unit trust owning shares in the trading company. 60% of shares owned in say your family trust, with remaining 40% in the unit trust. From this you can issue units out, as they will be 3rd party you can dispose and issue as needed, this would be the "Investor pool".

Losses are an issue in Unit Trust. Generally, development may have 2 years of losses before it generates a profit from sales. E4 CGT event needs to be considered in relation to these losses.

Straight partnership - Issue Is that if a partner leaves, ceases partnership.

Can use a Joint Venture.

Hybrid Trust may be a smart way to run it.

None of these are necessary the correct structure but just giving some examples...

So to reiterate Terry's comment, there is more than one way to skin a cat! Preparation is the key, incorrect advice at inception can be costly come tax time! Spend the money with a good advisor and do the due diligence.

DZ

 

[Paul@PFI]

There is a simple answer to the question posted....Get personal tax advice. You wont save money by getting no/bad advice. EVERY development is different.

Most important is asset protection of the land. And the construct,. Then there is what to do with the final lots...and the profits...Or the loss.

 

[sanj]

There is a simple answer to the question posted....Get personal tax advice. You wont save money by getting no/bad advice. EVERY development is different.

Most important is asset protection of the land. And the construct,. Then there is what to do with the final lots...and the profits...Or the loss.

Agreed.

Pls give paul or Terry a call and pay for advice specific to your situation.

 

[keroppi_gims]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

 

[LeoT]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

Keroppi Gims,

I'd listen to some of the other posters and pay for specific advice. It's really the only way to go mate.

Cheers

leo

 

[westminster]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

I'm sorry but your reasoning is incorrect. You may consider this a small project but it is quite large and incorrect structure and advice has the ability to wipe out ALL profit even send you into a loss.

These are not internet advice questions, you need to sit down with an accountant and learn it correctly so you can do proper feasibility.

 

[Paul@PFI]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

Are you asking about land tax, income tax, CGT, losses, asset protection, creditor claims, superannuation investment ???

Lots involved. Varies by state too.

Your lack of trust knowledge is very apparent. Don't worry that can be addressed. Mistakes will occur if you don't get personal advice.

You have ignored GST when you sell. Using the margin scheme may reduce that. Claiming GST on costs may assist too. . CGT probably wont apply but land tax may and there may be benefits doing this in a company and NOT a trust.

 

[Terry_w]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

I think I covered this in my book.

Company with shares owned by a DT:
1. Separate legal person
2. tax capped at 30% initially
3. franking credits later when dividends paid out
4. easily able to sell 'part' by selling shares
5. separate land tax threshold in many states
6. asset protection at ownership level and shareholder level
7 easier for estate planning

disadvantages
1. shares fixed (but flexibility attained by using a DT)
2. income changes character when it comes out (capital gains come out as dividends)
3. No 50% CGT discount (but CGT may not apply anyway, and/or tax can be reduced to lower than 24% anyway)

==================

Trustee Company for a DT
1. easy to distribute income to a wide class of people
2. asset protection at the ownership elevel and the beneficiary level
3. can retain profits via a bucket company

disadvantages
1. no land tax free threshold in many states such as NSW
2. no ability to retain income (but could be passed to a company beneficiiary which could)
3. harder to bring in new investor - title would need to be transferred = more stamp duty
4. estate planning more difficult - how do you pas on control to 2 different people such as children of the first marriage and new spouse.

 

[sanj]

Can someone advise me what are the advantages of a corporate trustee (e.g. X Pty Ltd ATF Y Discretionary Trust) over a company in terms of tax, if any?

I presume that a corporate trustee will be treated as a trust. However, a corporate trustee may distribute income to the company that is the trustee of the trust as well as individuals of the trust. Hence, overall tax may be reduced.

In the example where I develop and sell 5 units upon completion and retain 2 units, this means that I will be able to distribute income of the 5 units to individuals of the trust and the company upon sale and then receive 50% CGT discount on the 2 units if I hold them for over 12 months. Please advise if my reasoning is correct.

I'm sure terry or paul would be happy to advise you herr for a fee, get your credit card out

 

[Hodge]

Terry, where can I purchase your book?

 

[Terry_w]

Terry, where can I purchase your book?

Nowhere - unfortunately for me it is free. http://www.propertytaxsolutions.com.au/