Do full-time developers hold stock?

[MTR]

I met up with my new accountant today, he also happens to be a developer, that's handy.

Anyway, we discussed my projects etc. and he mentioned that when you start off as a developer it is a good idea to sell most of your properties to increase cash flow which in turn enables one to get into bigger projects. I know not rocket science, however when starting it is so difficult to know which way to go.

I have to break the mentality/habit of collecting, sometimes you need to sell to move forward.

 

[Deltaberry]

When you sell, you incur agent fees and tax.

When you buy again, you have stamp duty.

Developing for the purpose of selling entails most risk (as opposed to re-developing to engineer rent and therefore capital appreciation). Not only does it need to cover those costs I mentioned, it needs a much more substantial premium built in for the risk/effort.

 

[MTR]

Yes, I agree, managing risk is important

 

[Brady]

Was only thinking this today.

Fund a development site in Adelaide that was running the numbers,

Not in a position to buy just yet (6months off)

But this will be my first development and I was wondering which way would be best to continue.

What I keep getting stuck on is the best way to go due to taxation.


MTR if you are planning to offload stock how are you structuring the purchases?

I'm assuming under a company?

 

[MTR]

Was only thinking this today.

Fund a development site in Adelaide that was running the numbers,

Not in a position to buy just yet (6months off)

But this will be my first development and I was wondering which way would be best to continue.

What I keep getting stuck on is the best way to go due to taxation.


MTR if you are planning to offload stock how are you structuring the purchases?

I'm assuming under a company?

Hi Brady
I am actually not planning to offload everything, it will be dependent on many factors at the time.

My plan is to do 2 developments per year and perhaps hold 1 unit from each project, I would say on my numbers/size of projects around $400,000 pa, tax will be very important issue.

It is also depends on what the market is doing. If it is the beginning of a rising market I may hold more.

Also, if I can not sell which is always a possibility because the markets suddenly falls, the project must be able to look after itself, in other words cover the mortgage repayments.

I am new to this and still working through the tax/accounting side of things.

My accountant has recommended that I set up a company, this company will charge associated fees etc to the trust as necessary/accountant advises, but at the end of the day pay no more than 30% tax. Loans always in family trust. Building contracts always family trust.

You will need to see your own accountant - what may work for me may not be suitable for your situation.

MTR

 

[Aaron_C]

Most important criteria in development is one thing - money, and lots of it. The taxes/structure can be ironed out by the professionals but money is the only criteria that matters in the end. You can buy expertise, you can buy the builder, you can buy the land. Having experience can make you pay less for these but that's what it boils down to.

 

[MTR]

Most important criteria in development is one thing - money, and lots of it. The taxes/structure can be ironed out by the professionals but money is the only criteria that matters in the end. You can buy expertise, you can buy the builder, you can buy the land. Having experience can make you pay less for these but that's what it boils down to.

That's the one, cash flow everything, imagine running out of cash in the middle of the project

 

[Aaron_C]

That's the one, cash flow everything, imagine running out of cash in the middle of the project

Touchwood

 

[Brady]

That's the one, cash flow everything, imagine running out of cash in the middle of the project

Spot on thats why I'm holding off 6months to ensure I have the cash flow.

Hope I don't miss too many good deals between now and then.

 

[RPI]

For part hold, part buy we typically structure it this way.

2 entities (preferably trust but can be personal or combination of) buy the land.

Do the development, if you are doing any decent level or project management setup another entity and contract out to that)

Use partitioning to separate completed titles into the 2 entities, the investment entity and the development entity (no GST, CGT or stamp duty is payable at this stage)

Development entity sells their properties (GST & CGT payable)
Investment entity keeps

 

[INVSTOR]

For part hold, part buy we typically structure it this way.

2 entities (preferably trust but can be personal or combination of) buy the land.

Do the development, if you are doing any decent level or project management setup another entity and contract out to that)

Use partitioning to separate completed titles into the 2 entities, the investment entity and the development entity (no GST, CGT or stamp duty is payable at this stage)

Development entity sells their properties (GST & CGT payable)
Investment entity keeps

This is the set up I know of other small time developers doing.

 

[luce.rocks]

Ive personally seen a developer get taken out by gfc, lost around 150 or 200m worth of property but have a few to fall back on and live off despite bankruptcy. I intend to do the same

I've seen this too. The annoying thing is, my husband was running the company and told the partners many times that they should consider changing their business model so they retained more of their stock. Or to start building commercial instead of resi. Or even to just stop buying land and don't start any new projects for a while. None of which they did.

Then the GFC hit and the Spanish property bubble burst at the same time, banks called in loans, no credit to finish projects, no buyers because no one could get a mortgage, no jobs, banks going broke, etc. Both partners still have maybe 2 mil in the bank and a few random bits of land, family house, holiday house etc., so not exactly bankrupt, but life is radically different for them now.

And we went from the good life in Spain to a very tight existence back here in Oz. Boo

 

[MTR]

For part hold, part buy we typically structure it this way.

2 entities (preferably trust but can be personal or combination of) buy the land.

Do the development, if you are doing any decent level or project management setup another entity and contract out to that)

Use partitioning to separate completed titles into the 2 entities, the investment entity and the development entity (no GST, CGT or stamp duty is payable at this stage)

Development entity sells their properties (GST & CGT payable)
Investment entity keeps

This is basically what my accountant is recommending and makes sense.

 

[MTR]

Structure for Developing

I emailed my accountant regarding the structure, and this was his reply for those interested:

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 cash flow 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.

Also, You are required to register the Trust for GST as SOON AS the purpose of operation changes from being a residential investment to a development

Hopefully this may be helpful

MTR

 

[MTR]

Hi All
I posted this some time ago now and just giving an update.

I spoke to my accountant this morning regarding my structure.
Currently we have set up a company as recommended by my accountant.

However we spoke this morning he explained that my trust also needs to be set up for GST so we can claim etc.

As I am purchasing in my trust when seeking finance the bank always requires a letter from the accountant advising that the trust does not trade as a business and only used for purchasing property.

This situation of course has now changed. Also, apparently banks do check if a business is listed for GST. My concern is until I sell the product/or complete the product I will be showing a loss.

How do developers get around this???

Hope this makes sense, I absolutely hate this accounting/ATO stuff

 

[Brady]

Hi All
I posted this some time ago now and just giving an update.

I spoke to my accountant this morning regarding my structure.
Currently we have set up a company as recommended by my accountant.

However we spoke this morning he explained that my trust also needs to be set up for GST so we can claim etc.

As I am purchasing in my trust when seeking finance the bank always requires a letter from the accountant advising that the trust does not trade as a business and only used for purchasing property.

This situation of course has now changed. Also, apparently banks do check if a business is listed for GST. My concern is until I sell the product/or complete the product I will be showing a loss.

How do developers get around this???

Hope this makes sense, I absolutely hate this accounting/ATO stuff

Sorry only looked briefly, but is it a trading loss incurred from holding of the assets like interest etc or is it other expenses like project manager?

 

[vaughan]

The last 2 posts just went "blah blah blah fark me I have no idea blah blah I need to spend some serious time with my accountant blah blah WTF blah blah "

Edit: when I told my accountant my plans he asked me hold or sell? and I said hold and he said 'ok then but do it for more than 5yrs or you are liable for GST'. So I assume he's doing his end but I probably need to understand that more. It's good to make informed decisions

New houses attract GST just like new cars. However, if the house is PPOR or rented for 5 years then the GST is not payable.

Remember that GST is payable on the full SALE amount, whereas income/CGT is payable only on the profit. For an expensive house with small profit margin, the GST could be more than the profit.

 

[mrdobalina]

Remember that GST is payable on the full SALE amount, whereas income/CGT is payable only on the profit. For an expensive house with small profit margin, the GST could be more than the profit.

Rubbish. You pay gst that you've collected, but can claim back gst on what you've paid out as costs. The net effect is you effectively pay 1/11 of profits.

 

[perthguy]

Rubbish. You pay gst that you've collected, but can claim back gst on what you've paid out as costs. The net effect is you effectively pay 1/11 of profits.

Can you claim back GST if you are not registered for GST?

 

[TMNT]

When you sell, you incur agent fees and tax.

When you buy again, you have stamp duty.

Developing for the purpose of selling entails most risk (as opposed to re-developing to engineer rent and therefore capital appreciation). Not only does it need to cover those costs I mentioned, it needs a much more substantial premium built in for the risk/effort.

I agree, hate selling, hate paying fees, comissions and stamp duty

HOWEVER, there are other considerable Pros and cons in holding, well in my experience/view

CONS
1. You now have a brand new shiny OTP product on a smaller block of land, and lets for arguments sake say its worth $300k, in 5 -10 years, this prdouct will be second hand and no different to next door that was built 5 years before yours, hence you lose your stand apart factor. ie less potential for CG

2. My personal belief is that in terms of %, the CG is the lowest for brand new, small block dwellings, ie the typical OTP nightmare. As there is no more value add you can do to it. The person who has held on to their old dwelling on a substansial block of land has done much much better

3. Usually the yields are poorer for brand new dwellings, because of the higher selling price and not as high rental return, so that could be a significant opportunity cost

PROS
1.Depreciation: you will get crap loads of it!

2. GST discount, due to the margin scheme its not exactly 1/11 but for arguments sake, lets say it is. Say if you sold your $300k dwelling, then essentially your sell price is $272+GST, so you esseitnally 'lose' almost 10%.
However, if you keep it for long enough the GST is reduced or becomes negligible, ie if you sell in 10 years then you get $300k
I see those magazine articles that say "person A subdivided their block and now the back new house at the back is worth $X with a net gain of $100k in 8 months work, who intend to sell it"
but when they consider the GST, their net profit might only be $40k including agency costs!!