Equity vs Developments

[TMNT]

Was having a think last night,
Ive been looking at development sites, and its pretty hard in the areas ive been looking at.

then I got thinking, why do developments? other then for something different

I can find renovation projects that return 25% (buy $200k, spend $20k inc stampduty, sell for $270k for $50k profit)

a development can say return 20-30%, while at the smaller development end even 20% is hard to achieve

RENOS
Pros/Cons
+Short time frame
+Dont need as much cash
+Great Yield if I dont refinance
+Greater scope of CG (Assuming I dont sell)
+Option of Instant cash (if I sell)

- Decreasing cash reserves if I hold
- Cashflow negative if I refinance at the updated price
- Increased need for buffer with increasing property numbers

DEVELOPMENTS
Pros/Cons
+Get Cash assuming I sell
+ Huge Depreciation
+ GST benefits if I dont sell

- Long timeframe
- Final product has less likely for CG chance due to being new, and unable to value add
- Need bigger cash reserves



What would others in my situation do and why?

I ask Somersoft members with their infinite wisdom

Thanks everyone

 

[oc1]

If you have the cash then do a development. 6 units would be like doing 6 individual reno deals. If rather one deal than six.

You can also retain some and get paid forever via rents.

 

[MTR]

If you have the cash then do a development. 6 units would be like doing 6 individual reno deals. If rather one deal than six.

You can also retain some and get paid forever via rents.

Yep, that makes sense, also its new product and all the benefits that come with this.

 

[imbi3]

DEVELOPMENTS
Pros/Cons
+Get Cash assuming I sell
+ Huge Depreciation
+ GST benefits if I dont sell

Thanks everyone

Hi TMNT, what do you mean by GST benefits if you don't sell?

 

[datto]

Hi TMNT, what do you mean by GST benefits if you don't sell?

No sell. no GST to ATO....yet input tax credits are claimed.....right?

 

[TMNT]

No sell. no GST to ATO....yet input tax credits are claimed.....right?

Yes pretty much, I wasn't even considering input tax credits though


Basically, unless you keep all of them, or all but one, your final price say 500k becomes 454k+gst as it's deemed a busienss and therefore gst is applicable


Also, if you hold it for 5 years? Then gst becomes not applicable (experts correct me if I'm wrong)

So when you see on those property magazines, person A subdivided their block into four and built townhouses and manufactured a massive 200k in 9 months when they sell, most don't incorporate gst when they sell which in many cases eliminates up to 75% of the profit

 

[MTR]

Also, another item which has not been mentioned when developing as a business an accountant worth his salt will set up a structure where you will have a project management company to offset tax, so it can get creative to reduce tax etc. This can also work the other way this company can be used to help with serviceability and accessing finance.

Cheers
MTR

 

[Feradd]

No sell. no GST to ATO....yet input tax credits are claimed.....right?

My accountant has told me different. Apparently you can claim the GST credits during the build phase which helps the cash flow of the project but if you hold the end product and don't sell then you need to repay those GST credits back to the ATO. You would revalue the finished development and take this out of your total loan amount and use this to pay the ATO. If you sell say 2 and keep 3 then you would pay back to the ATO 3/5ths of GST claimed. At this stage hopefully the units are all rented out and strongly cash flow positive.

Happy to hear if anyone else has heard otherwise.

 

[Ace in the Hole]

If you have the cash then do a development. 6 units would be like doing 6 individual reno deals. If rather one deal than six.

Agree, and small developments are a good way of accumulating multiple properties at once without all the extra transaction hassle and cost if purchasing separately.

 

[BLTN]

So when you see on those property magazines, person A subdivided their block into four and built townhouses and manufactured a massive 200k in 9 months when they sell, most don't incorporate gst when they sell which in many cases eliminates up to 75% of the profit

Can you provide some numbers to back this up?

 

[MTR]

My accountant has told me different. Apparently you can claim the GST credits during the build phase which helps the cash flow of the project but if you hold the end product and don't sell then you need to repay those GST credits back to the ATO. You would revalue the finished development and take this out of your total loan amount and use this to pay the ATO. If you sell say 2 and keep 3 then you would pay back to the ATO 3/5ths of GST claimed. At this stage hopefully the units are all rented out and strongly cash flow positive.

Happy to hear if anyone else has heard otherwise.

I think this is correct, however I chose not to do this and to claim GST and the end of each development because otherwise I will be showing a loss in my trust. Selling at the end of each project and then claiming GST keeps my figures nice and clean and shows profits which is what I need when sourcing finance.
I think you do this too oc1???

 

[Feradd]

I think this is correct, however I chose not to do this and to claim GST and the end of each development because otherwise I will be showing a loss in my trust. Selling at the end of each project and then claiming GST keeps my figures nice and clean and shows profits which is what I need when sourcing finance.
I think you do this too oc1???

I don't quite follow you MTR. If you claim GST from the ATO during the build phase is'nt that money coming in and so improving your profit in the trust up to that point? I don't see how you can avoid reporting a loss if you are halfway through a build at financial year end. You'll have large amounts coming out paying the builder but havn't yet settled on the sale of units until completion.
Also when you say showing profits helps source finance are you talking about finance for other projects? At the build stage you would already have had all the finance approved for that particular project.

 

[MTR]

I have 3 projects on the go at the moment in various stages all purchased in my Trust, this is my first year as a developer.

My trust is showing a loss ie holding costs of these sites etc.

If I claim GST in quarterly instalments for example, it will not necessarily show a profit in my case at the moment. I don't sell anything OTP, they will be sold on completion of each project.

I have 2 years to claim GST from beginning of each project, I complete each project in a 12 month period, then claim GST on the completed projects, where I am showing at least 20% profit on each project.

As mentioned these are my first 3 projects. My MB has also advised I would not want to be showing a loss in my Trust/company as it will be difficult to source finance the last thing I need.

Cheers
MTR

 

[TMNT]

Can you provide some numbers to back this up?

its in every property magazine every month

usually stories about fairly young people, who for the first time have subidivided a block or built an additional dwelling and have gained a massive Equity gain according to the article, but you incorporate GST, and selling costs

Have a look

 

[BLTN]

its in every property magazine every month

usually stories about fairly young people, who for the first time have subidivided a block or built an additional dwelling and have gained a massive Equity gain according to the article, but you incorporate GST, and selling costs

Have a look

So, no then?

I don't have any property magazines, but I have just done some reading on the ATO's website and this is what I've found:

- GST is payable on any sale of a new building if you've developed for the purposes of selling. It seems GST only applies if you make over $75K, but that would seem to be most developments...
- On a quick read, it seems you can apply the margin scheme most of the time provided you include it in the sale contract and you are registered for GST (see below).

Generally, you can use the margin scheme if the following applies:
- you are registered for GST (or required to be registered for GST)
- you are selling the property in the course of your enterprise and GST applies to the sale (that is, a taxable sale)
- you have a written agreement with the purchaser to apply the margin scheme to the sale.

You cannot use the margin scheme if you are selling a property that you either:
- purchased as a taxable sale and the GST on the sale to you was not calculated under the margin scheme
- inherited from a person who could not use the margin scheme
- obtained from a member of the same GST group who cannot use the margin scheme
- obtained, as a participant in a GST joint venture, from the joint venture operator who cannot use the margin scheme.

It looks like the only way you can 'get out' of paying the GST is if you hold the property as a rental for 5 years or more as it no longer counts as a 'new' residential premises for the purposes of calculating GST.

This certainly makes things a bit more interesting - I need to do some more research on this to work out the tax implications of developing.

Would love to get some feedback from an expert on here though?

 

[TMNT]

So, no then?

I don't have any property magazines, but I have just done some reading on the ATO's website and this is what I've found:

- GST is payable on any sale of a new building if you've developed for the purposes of selling. It seems GST only applies if you make over $75K, but that would seem to be most developments...
- On a quick read, it seems you can apply the margin scheme most of the time provided you include it in the sale contract and you are registered for GST (see below).

Generally, you can use the margin scheme if the following applies:
- you are registered for GST (or required to be registered for GST)
- you are selling the property in the course of your enterprise and GST applies to the sale (that is, a taxable sale)
- you have a written agreement with the purchaser to apply the margin scheme to the sale.

You cannot use the margin scheme if you are selling a property that you either:
- purchased as a taxable sale and the GST on the sale to you was not calculated under the margin scheme
- inherited from a person who could not use the margin scheme
- obtained from a member of the same GST group who cannot use the margin scheme
- obtained, as a participant in a GST joint venture, from the joint venture operator who cannot use the margin scheme.

It looks like the only way you can 'get out' of paying the GST is if you hold the property as a rental for 5 years or more as it no longer counts as a 'new' residential premises for the purposes of calculating GST.

This certainly makes things a bit more interesting - I need to do some more research on this to work out the tax implications of developing.

Would love to get some feedback from an expert on here though?

are you talking about GST on Sale or GST on purchases???

ie if you talk to a builder and he quotes you $200k to build, you'll be paying $220k Inc GST

If you sold multiple builds (which means you are a business, $75k turnoever or not), if you sold one then you could get away with it, but say you sold a few at $400k for example,

the magazines will say, Person A sold for $400k, paid $200k+$100k for land for example, netting them an equity gain of $100k, which is a good effort,

but since the sale now becomes $363+GST,

ignroing margin scheme just for arguments purposes, the profit will now be $63k as opposed to $100k, add on the fact that you collected $36k in GST and but paid $20k in gst, means your profit is different depending on whether you are calculating on $200k build or $220k build,

obviously other GST inputs etc. etc. change the figure, but thats a basic outline

 

[BLTN]

are you talking about GST on Sale or GST on purchases???

ie if you talk to a builder and he quotes you $200k to build, you'll be paying $220k Inc GST

If you sold multiple builds (which means you are a business, $75k turnoever or not), if you sold one then you could get away with it, but say you sold a few at $400k for example,

the magazines will say, Person A sold for $400k, paid $200k+$100k for land for example, netting them an equity gain of $100k, which is a good effort,

but since the sale now becomes $363+GST,

ignroing margin scheme just for arguments purposes, the profit will now be $63k as opposed to $100k, add on the fact that you collected $36k in GST and but paid $20k in gst, means your profit is different depending on whether you are calculating on $200k build or $220k build,

obviously other GST inputs etc. etc. change the figure, but thats a basic outline

I'm talking about GST that you need to pay on selling a property that you've developed. I've just created a new thread so as not to complicate things in here (and also because it is a complicated topic)