Offsetting CGT, Tax, etc...

[Longrass]

I am thinking about some strategies for tax minimisation, etc...

Scenario here:

- I purchase 6 blocks of land (ABC Pty Ltd ATF Mr ABC Property Trust) for $250k each, total $1.5mil.
- I contract a builder to build 6 houses for $350k each, total $2.1mil.
- Combined cost (excluding costs, stamping, etc) for each house in $600k.
- My strategy is to sell 5 to pay down the 6th.
- Each of the 5 houses sell for $700k of which I gross $100k profit each, being a $500k gross return

Being that I haven't kept each dwelling for more than a month and none are my PPOR, would it be fair to say that:

- All 5 will attract CGT.
- The smartest thing to do (Being I am on a gross wage of $80k PA), distribute that $500k to the company and pay 30% tax, leaving me with $350k cash.
- Use the $350k cash to pay the 6th loan down to $250k. (I am under the impression that ABC Pty Ltd ATF Mr ABC Property Trust can own my PPOR being the 6th)

Please correct me if I am wrong, in this instance. I would presume also that they 6th property being my PPOR for 12 months will not attract any CGT on its sale.

If the builder offered to build me 5 houses for $2.1 mil (or $420k each) and build the 6th for free, how would I go CGT wise?

This was something that occurred to me today, however I am sure this has a very quick simple answer that has been discussed here before.

Knowing the above scenario, can anybody suggest any ways that I can improve on this, both tax wise, security wise and profits wise.

Thank you so much,

 

[pinkboy]

What cash/equity do you have to start with?

LVR?


pinkboy

 

[LoneWolf]

What cash/equity do you have to start with?

LVR?


pinkboy

This has an effect on tax and CGT?

 

[pinkboy]

This has an effect on tax and CGT?

No, but to do the above will need a fair whack of cash to use as deposits etc - and to go through all of that for the sake of making about the same kind of cash at the end seems like a long way to go about things.....especially construction of 6 dwellings compared to say a development site.

Or maybe Im not reading it right.....it is Friday before a long weekend and I have a head full of thinners!


pinkboy

 

[LoneWolf]

No, but to do the above will need a fair whack of cash to use as deposits etc - and to go through all of that for the sake of making about the same kind of cash at the end seems like a long way to go about things.....especially construction of 6 dwellings compared to say a development site.

Or maybe Im not reading it right.....it is Friday before a long weekend and I have a head full of thinners!


pinkboy

I thought so PB,

I am fairly certain that OP would have had this finance side of things sorted prior to this detailed post

 

[Terry_w]

I am thinking about some strategies for tax minimisation, etc...

Scenario here:

- I purchase 6 blocks of land (ABC Pty Ltd ATF Mr ABC Property Trust) for $250k each, total $1.5mil.
- I contract a builder to build 6 houses for $350k each, total $2.1mil.
- Combined cost (excluding costs, stamping, etc) for each house in $600k.
- My strategy is to sell 5 to pay down the 6th.
- Each of the 5 houses sell for $700k of which I gross $100k profit each, being a $500k gross return

Being that I haven't kept each dwelling for more than a month and none are my PPOR, would it be fair to say that:

- All 5 will attract CGT.
- The smartest thing to do (Being I am on a gross wage of $80k PA), distribute that $500k to the company and pay 30% tax, leaving me with $350k cash.
- Use the $350k cash to pay the 6th loan down to $250k. (I am under the impression that ABC Pty Ltd ATF Mr ABC Property Trust can own my PPOR being the 6th)

Please correct me if I am wrong, in this instance. I would presume also that they 6th property being my PPOR for 12 months will not attract any CGT on its sale.

If the builder offered to build me 5 houses for $2.1 mil (or $420k each) and build the 6th for free, how would I go CGT wise?

This was something that occurred to me today, however I am sure this has a very quick simple answer that has been discussed here before.

Knowing the above scenario, can anybody suggest any ways that I can improve on this, both tax wise, security wise and profits wise.

Thank you so much,

You are wrong on muliple fronts

Possibly no CGT at all, just income tax
No main residence CGT exemption for a trust property.
Watch out for land tax issues as well

 

[LoneWolf]

You are wrong on muliple fronts

Possibly no CGT at all, just income tax
No main residence CGT exemption for a trust property.
Watch out for land tax issues as well

Hi Terry,

I am in similar boat as OP.

So, if you sell some of them after completion, you only occur income tax for these?

What about the one you decide to keep? Let's say you rent it out for xx period of time, would you incur CGT later on?

Can you please elaborate on this?

Thanks

 

[Terry_w]

It depends on the circumstances. If you are developing the Capital gains provisions don't apply and therefore no 50% CGT discount.

 

[Longrass]

You are wrong on muliple fronts

Possibly no CGT at all, just income tax
No main residence CGT exemption for a trust property.
Watch out for land tax issues as well

Thanks Terry,

When you say income tax, do you mean the company will pay income tax at 30% on the profits?

I was unaware you could not claim the PPOR concession through a trust, I was under the impression that if it is your PPOR and you distribute all profits to the beneficiary you could claim. Appears I am wrong.

No land tax in the NT

 

[Longrass]

It depends on the circumstances. If you are developing the Capital gains provisions don't apply and therefore no 50% CGT discount.

Could you elaborate on this please mate

 

[Longrass]

What cash/equity do you have to start with?

LVR?


pinkboy

10% cash and 10% equity through on completion valuation. 80% or better LVR.

 

[Terry_w]

Could you elaborate on this please mate

Cgt only applies to assets purchased to hold long term. If u develop this may be treated as revenue and then not a capital gain.

 

[Terry_w]

Thanks Terry,

When you say income tax, do you mean the company will pay income tax at 30% on the profits?

I was unaware you could not claim the PPOR concession through a trust, I was under the impression that if it is your PPOR and you distribute all profits to the beneficiary you could claim. Appears I am wrong.

No land tax in the NT

If held by a trust then the company rate won't apply. Trusts don't pay tax generally but the income will flow through to beneficiaries who will pay the tax. If income then no 50% discount if capital gains then this could apply.

 

[Longrass]

If held by a trust then the company rate won't apply. Trusts don't pay tax generally but the income will flow through to beneficiaries who will pay the tax. If income then no 50% discount if capital gains then this could apply.

In the case of a corporate beneficiary Terry? Potential idea being to utilise corporate tax rate to build the asset/income base and over time replace my current salary with a distribution from the trust, at such time also being able to access the CGT discount benefits when the long term paid off assets are traded in for new ones... Does this make sense?

Do you have comment in relation to the OP comment on the builders "discount" sir?

 

[Terry_w]

In the case of a corporate beneficiary Terry? Potential idea being to utilise corporate tax rate to build the asset/income base and over time replace my current salary with a distribution from the trust, at such time also being able to access the CGT discount benefits when the long term paid off assets are traded in for new ones... Does this make sense?

Do you have comment in relation to the OP comment on the builders "discount" sir?

Builders so called 'discount' - he is charging you more for the other 5 so I would think you would have to average out the cost over the 6.

If using a company beneficiary then the company will pay company tax rate on the income = 30% whether capital gains or income. But once the money is in the company it loses its character so while it can be retained in the company and paid outin lawer years it won't be capital gains when paid out, but will be dividends.

 

[sanj]

Why would you buy 6 blocks of land that would have another developers profit and gst built in? Also, if you're looking at 100k gross profit run, don't walk, away. Profit would be miniscule once all costs considered.

 

[Paul@PFI]

And on top of the issues indicated by Terry there are all the GST issues.
1. GST on the sales...This comes straight off profit margin. You cant charge more for a prop that includes GST.
2. Margin scheme entitlement / benefits ?
3. GST claimed on costs - Not 100% !!
4. Financing issues assoc with GST
5. GST issues with acquisition of land. The developer you buy from may charge GST - Hence a reason to structure eahead of contracting to buy.

No CGT....Income tax at the beneficiaries marginal tax rates. Timing of sales may be a strategy to consider.

 

[Paul@PFI]

Builders so called 'discount' - he is charging you more for the other 5 so I would think you would have to average out the cost over the 6.

If using a company beneficiary then the company will pay company tax rate on the income = 30% whether capital gains or income. But once the money is in the company it loses its character so while it can be retained in the company and paid outin lawer years it won't be capital gains when paid out, but will be dividends.

Or its assessed to Trustee at 49% ??? Bucket company strategies often dont work. They sound like a tax saving but often fail. Full and final tax using a company likely to be 59%....Dividend strategies need to consider this.

 

[Longrass]

Why would you buy 6 blocks of land that would have another developers profit and gst built in? Also, if you're looking at 100k gross profit run, don't walk, away. Profit would be miniscule once all costs considered.

Margin scheme GST, not to sure what costs you are relating to, however I do this fairly regularly and I believe $100k on a simple resi project is fairly good going...? Can you suggest what I may be missing?

 

[Longrass]

Or its assessed to Trustee at 49% ??? Bucket company strategies often dont work. They sound like a tax saving but often fail. Full and final tax using a company likely to be 59%....Dividend strategies need to consider this.

Sorry, im lost, where does the 49/59% come into it? First I have heard of this...