My little Mona Vale development update - Phase 3

hi michael, i've just read thru your thread, what a great journey!! well done for coming out the other side still making money, despite the people around you who have failed you... "not their problem" kinda person! I can't stand these kinda people, but of course in PD work, they're everywhere...

anyways, I'm watching your thread closely, can't wait to see the build start!

congrats.
Thanks Annietom! :D If there's one thing I've learnt through this project it is the importance of persistence. Obstacles are put in the way to determine just how much we want something...

Woohoo! What a lovely big hole in the ground. You must be stoked!
Hi Ms Jade, yep very happy with my nice big hole. Can't wait until there's actually something in it but I understand that's not far away now too. Will post up photos and commentary throughout the build and field any questions that others might have on the process or learnings.

Cheers,
Michael
 
Michael,

Thanks, great reply!

So if you took say this final 300k (and keep your current PPOR) and declared 300k in yours and / or wife's tax return for the period, accordingly you would be actually pocketing the full amount after TAX against your personal income return(s)?

You are saying other than GST the ATO won't won't require any further taxable amounts - even if it shoots your income up substantially for the period?

Have I or you missed something here, or are you in fact correct in the eyes of eyes of the ATO, if this was purely a develop and sell all off project.
 
You are saying other than GST the ATO won't won't require any further taxable amounts - even if it shoots your income up substantially for the period?
That's right. You can't be taxed twice on the same income. In this instance it is profit from sale which is not liable for CGT but is liable for GST.

It would be net in my pocket, but who wants to work for three to four years on a multi-million dollar project just to put $300K in my back pocket. I'll take the $500K in net worth increase and hold the income producing assets. And as I said earlier, I actually think it will be quite a bit more than $500K at completion...

Cheers,
Michael
 
Well done Michael! You've certainly shown the value of persistence!

Also the selfless way you've shared the journey so far (warts and all) has benefited many people immensely (me included).

When you get to Brisbane drop us a line and we'll buy you a celebratory beverage or 3!

Cheers
N
 
Michael,

Say you sold the whole lot, i would be assuming this would be taxed under the ordinary income concepts of running a property development business, and if not they would be classed as a capital asset and therefore liable for CGT. What's your thinking of no tax being payable on sale?

That's right. You can't be taxed twice on the same income. In this instance it is profit from sale which is not liable for CGT but is liable for GST.

It would be net in my pocket, but who wants to work for three to four years on a multi-million dollar project just to put $300K in my back pocket. I'll take the $500K in net worth increase and hold the income producing assets. And as I said earlier, I actually think it will be quite a bit more than $500K at completion...

Cheers,
Michael
 
Long time...

Hi Michael

Long time... glad to see your development is off the ground. Welcome to the world of building :D

We have just had a slab go down on a dual occupancy on the central coast. Even though I work for a builder, it's still a learning curve as the actual owner. The biggest learning for me will be the actual subdivision.

Good luck and I'll follow this thread to watch what is going on.
 
I am also interested in this CGT development idea - my understanding is that it would be either treated as business income or personal income?
 
I am also interested in this CGT development idea - my understanding is that it would be either treated as business income or personal income?

In simple terms I understand it as:

Michael is developer as a Company then company tax 30% applies. CGT does not apply and there is no tax free threshold and no neg gearing. Simple profit or loss.

It is essentially this: a pty ltd business that spent capital (land and building) $$$ to earn income (rent) of $. If the interests costs of loan for $$$ is $, then $ is equal to $ so no profit/no loss so no tax.

If greater income than costs, then profit is taxed at 30% if less then loss is accrued but not offset against any future pty ltd profit income.

AND if Michael lives in one he would have to pay $ rent to the Company. he cannot live rent free with triggering a FBT event.

LASTLY if Michael wants to move into a unit as PPOR, Company has to sell him one. GST applies to that sale. Profit applies to the sale if the income that year is greater than losses as outlined earlier.

Also Michael pays stamp duty on the purchase. So he sells his PPOR and gets a new PPOR, then any future sale is CGT and GST free. But to buy one would need the site subdivided and body corporate set up. Costs and fees there to be considered. If it stays all company then rent is back to profit and loss but when and if it is sold, GST applies.

My two cents, Peter 14.7
 
My two cents, Peter 14.7

Peter,

I am unsure on what structure Michael is operating this development from, however he has indicated above that he has factored in holding costs and would still make a profit if all sold.

Therefore, assuming a company, even if he fully exhausted his carried forward losses from rental pre development, he would still be in a situation where the development sites would sit as trading stock and once sold an overall profit would eventuate. So this doesn’t really answer the question as to why no income tax or CGT would be payable?
 
Peter,

I am unsure on what structure Michael is operating this development from, however he has indicated above that he has factored in holding costs and would still make a profit if all sold.

Therefore, assuming a company, even if he fully exhausted his carried forward losses from rental pre development, he would still be in a situation where the development sites would sit as trading stock and once sold an overall profit would eventuate. So this doesn’t really answer the question as to why no income tax or CGT would be payable?

Hi Rickardo,

If it is sold as a 'development for profit', GST would be payable, and income tax on the profit would also be payable. CGT would not be payable, as the profit would come under the 'income under ordinary concepts' rule.

You are right, if there is a profit on sale, either CGT or income tax is payable. If it is a GST supply, then GST is payable, also.
 
Ok, so my point being (as I'm not an accountant), what would the final take home profit be on this project after all costs and taxes based on a 'sell all' scenario when ready.

My rough calculations are sitting on around $150k after tax and everything based on a higher tax bracket threshold for the owner.

Am I getting close here?
 
Abby and others,

You're right in that it would be income taxable on top of the GST. Don't you love our tax system? So my $300K income would need to be taxed as well. But it is held in a HDT with company as trustee structure and would be liable for the 30% corporate tax rate on any profit in the year. I've got some pretty big ongoing expenses within the structure so I'm not sure how much of that would end up being taxed, but worst case scenario would be the maximum $100K odd leaving $200K in net net net take home dollars. ;)

I understand these would be fully franked if I paid them out to the directors as a dividend once I paid the corporate tax.

But its all a moot point as I intend to hold all three and keep my $500K margin intact and let them all out. Still, an interesting discussion and it shows the pitfalls for developers relying on a build to sell model. Everyone is into our pockets for part of our profits. Its taxed through the build with section 94 levies and the like, then GST taxed at sale and income tax on any residual profit. The poor old developer who's taken on all the risk isn't left too much of the profit pie for all his hard work.

Cheers,
Michael
 
But it is held in a HDT with company as trustee structure and would be liable for the 30% corporate tax rate on any profit in the year. I've got some pretty big ongoing expenses within the structure so I'm not sure how much of that would end up being taxed, but worst case scenario would be the maximum $100K odd leaving $200K in net net net take home dollars. ;)

I understand these would be fully franked if I paid them out to the directors as a dividend once I paid the corporate tax.

At this point, Michael, who owns the units in the HDT?
 
So now if you drew out 200k from the company as your profit for the sole director, then it would be down 100K or so after it gets declared against the ATO personal income return.

So in a general sense under a develop and sell all model, we are left with around $100K profit from such a development. It may be less once Michael crunches the final numbers, and it would be good to see how it computes at the very end.

My point being is if you were purely developing to sell, this seems VERY high risk & VERY STRESSful for a very low profit margin.

Definitely not your 20% builders / developer margin we often hear & read about.

This could be a message to those looking to develop for profit, - couple of misfires and less due diligence than Michael has shown and one could very much be left is negative 100K or more take home loss!

Very interesting figures.

Also may prove that you aren't always better off to buy wholesale rather than pay retail on something already built as building costs are rising fast and so to are the unforeseen risks which are difficult to budget for.
 
You're right in that it would be income taxable on top of the GST. Don't you love our tax system? So my $300K income would need to be taxed as well. But it is held in a HDT with company as trustee structure and would be liable for the 30% corporate tax rate on any profit in the year. I've got some pretty big ongoing expenses within the structure so I'm not sure how much of that would end up being taxed, but worst case scenario would be the maximum $100K odd leaving $200K in net net net take home dollars. ;)

I understand these would be fully franked if I paid them out to the directors as a dividend once I paid the corporate tax.

Hi Michael,

While the assets are owned in the name of a corporate trustee they are actually held in trust for the beneficiaries of your HDT. This means the principles of company income tax (including franking) do not apply.

The profit would be not taxed at 30%, rather the net income of the trust for the year would be distributed by the trustee as determined by the wording of your trust deed and tax paid by the beneficiaries at their marginal rate.

As this is a HDT I would assume income would go to your unit holders, but it depends on the wording of your deed and how the trust has been set up.

I know this is a moot point but just giving everyone else some info.
 
My point being is if you were purely developing to sell, this seems VERY high risk & VERY STRESSful for a very low profit margin.

Definitely not your 20% builders / developer margin we often hear & read about.

This could be a message to those looking to develop for profit, - couple of misfires and less due diligence than Michael has shown and one could very much be left is negative 100K or more take home loss!

Also may prove that you aren't always better off to buy wholesale rather than pay retail on something already built as building costs are rising fast and so to are the unforeseen risks which are difficult to budget for.

Interesting analysis, my thinking would be this is Michael's first development, and from reading this thread it's clear he has learnt a lot - if and when he decides to develop again the margin would increase significant due to him being much more aware of how to minimise potential cost blow outs.

So maybe the 20-25% margin most developers rely on only comes with experience? Or if you happen to obtain this on a first development there may be some luck or good timing of the market involved.
 
So now if you drew out 200k from the company as your profit for the sole director, then it would be down 100K or so after it gets declared against the ATO personal income return.
No Abby, that's double taxing...

Rickardo is right due to the HDT structure. I wouldn't pay 30% company tax, I'd end up paying income tax at the marginal rate based on who the net profits were distributed to. But I definately wouldn't pay both!

Worst case scenario, that original $300K after GST and sales commissions were paid would reduce to $170K odd after income tax was applied at a high marginal rate. Not pretty, but not $100K...

But its all moot, I'm not selling any of them. My margin will be calculated as the valuations at completion less my total funding. The conservative bank vals have it around $500K but the REAs have it a touch more.

$500K or a touch more may not be brilliant, but I'm pretty thrilled with it on a first attempt.

Cheers,
Michael
 
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