Entity required?

[Mitchw]

Hi Everyone,
Have Joined a while ago but have been researching up until now.

I'm about to pull the trigger on a small residential developement. Will be putting 4 row dwellings on a 900m block in Adelaide. The aim will be to keep 2 and sell the other 2.
Our PPOR is in my girlfriends name.

I have intended on buying the initial property just under my name, but have been told I should consider setting up separate trust for this.

Would like to get some of your expert opinions on the matter, and can provide whatever info I've left out!

Thanks,
Mitch.

 

[Terry_w]

That is like asking 'what should I have for dinner?'.

A broad answer - some sort of food - is appropriate. but the sort of food you need will depend on a lot of things, such as your weight, body type, any illness, vitamin definciencies etc.

I think you need to see a dietician.

 

[Brady]

Seek specific advise based on your exact plan of attack. Would be dependnat on your income, partners income, how long you hold the properties, when you sell them, how long you hold the remaining, list goes on.

Given that you're looking to sell straight away after developing is acting in a business nature, best to set it up the best way possible.

What has your tax professional suggested? Don't sign anything until speaking to them first.

 

[Paul@PFI]

I would also be seeking tax advice for the consequences so your budget plans these taxes in:
- Land tax
- Duty
- Income tax (not CGT)
- GST on sales, GST on build costs etc
- ABN registration
+ Apportioning costs and Accounting "101" on record keeping

All costs will be affected by GST and you may find the margin scheme will mean you make a better profit. Your idea to keep + sell will further complicate things....Your depn schedule will be GST inclusive and the ones you sell wont. So your records need to assist that issue. Your tax advice probably has already addressed all of this. (Its at this point 99% say "No"). I'm always surprised by number of people who think they can plan a profitable build when they skip the basics. Its like opening a restaurant without a kitchen. A failure to plan is a plan to fail is the old adage.

The entity / structure may be a waste of money depending on many issues personal to yourselves. A unit trust may save a bit of duty long term. May. Maybe. A discretionary trust may assist with taxes. If you both work FT then its possible that this could be a problem anyway.

Have you considered entity structuring so that a builder or other creditor doesn't chase the land ??

The issue of a relationship breakdown in the construction / sales phase needs some thoughts too.

 

[D.T.]

That is like asking 'what should I have for dinner?'.

A broad answer - some sort of food - is appropriate. but the sort of food you need will depend on a lot of things, such as your weight, body type, any illness, vitamin definciencies etc.

I think you need to see a dietician.

Need to see a dietitian to decide what to have for dinner? That sounds overkill. Much like most trust structures.

 

[Terry_w]

Need to see a dietitian to decide what to have for dinner? That sounds overkill. Much like most trust structures.

When you put it that way it does sound like over kill!

But structuring is not just about trusts. There are many ways to structure in personal name ownership too.

 

[Mitchw]

Thanks for all your help.
Originally my accountant said to do the developement without an entity. He does however operate my optometry business as a unit trust.

I've asked him to go through the consequences with me again, I get the feeling this may not be his area of expertise so may contact you in the future Paul.

To be honest I hadn't considered your last two points about a builder chasing the land, but will now!

Thanks again for the suggestions and help.
Cheers,
Mitch.

 

[Mry]

Commercially speaking, most developments are prepared using a company (or a trust with a corporate trustee) in the event that some sort of claim for building defects comes up in the future, the claim is limited to the company and stops there (unless they find a way to sue you personally). The big problem is that since the land is in one entity, the end product will be in the same entity as well.

This is how I would do it.

1. Set up 2 trusts (sell trust, rent trust) with 2 different corporate trustees. Buy the land in the rent trust.
2. Subdivide the land, then transfer the land you intend to sell into the sell trust. The sell trust pay transfer duty on acquiring them.
(which will increase the cost base for the eventual sale. The rent trust may incur a capital gain/income to declare in itself on the value of the property transferred less purchase costs and subdivision costs. This should not matter since we are merely declaring a gain that would have been earned in the sell trust anyway).

3. Build the houses. See your accountant for tax treatment and the allocation of debt.

4. Sell the houses in the sell trust. The rent trust may have some losses that you can distribute to it to offset some of the profit (since it can claim interest, rates, etc during the construction phase - make sure with your accountant/lawyer that you can do this). Of the sale proceeds, ensure that you pay off the debt related to the property costs of the sell trust (unless you don't have the capacity to repay it - again see your accountant).

I would recommend paying the transfer duty on transferring the subdivided land prior to the build as other options would be more costly. SA stamp duty on a say $450,000 transfer (if that was the value of the land after subdivision but prior to construction) would be $14,093. Setting up a joint venture to distribute the output (ie houses) would cost you all up at least $15,000 in fees that you may not be able to claim all of and if you are selling the properties in the sell trust, it makes no difference at the end of the day.

You could buy the land in your own name, and then transfer the land after subdivision to just one trust, but that depends on whether the properties will be negatively geared after construction. I would be tempted to.

 

[Mitchw]

Thanks Mry,
I do like the simplicity of buying the original property in personal name and then transferring the 2 lots to be sold to a trust.

Will run that strategy past my accountant and see what they think.
Cheers!

 

[Paul@PFI]

Tax advisers would probably think that idea borders on ludicrous.
- Triggers for tax
- NO CGT as its not a CGT asset. It seems a business use asset. Trading stock.
- GST on the newly subd land AND on the final build (perhaps land is creditable or eligible for margin scheme)
- Stamp Duty a certainty

Building defects are not the owner responsibility. Its a trade responsibility where a license is involved. If I contract a builder to build 4 x Townhouses then the defect issue is between that licensee and me. If I sell nobody comes back to me. A "building company" concern only occurs when the construction company is operated by a licensed builder (ie AV Jennings, Metricon). If I own a company that does a build and owns the property its not a issue.

Why wouldn't a single entity / owners sell down the sales then hold the assets that are a keep.

 

[Mitchw]

Thanks Paul,
My accountant basically said to stay as originally planned, as I don't have any low income earners to outset the profits to a trust would be of no benefit. Neither my partner or I look like coming out of of the high tax bracket anytime soon so their was no point holding the profits in a company either.

He also agreed with Paul and said definitely a single entity as the builder and their insurance is responsible for the build.

Thanks again for all the suggestions and help.