Packaged property

[Lotana]

I just had a wild idea and would like to find out if anything like that is known / used.

Summary of the idea:
To flip a property we set up a structure (company?), buy the IP in the structure's name, and then sell the structure to the buyer. Because the property is not sold there is no stamp duty to pay by the buyer.

Example:
1. Set up a company "FlipWrap # 142"
2. You find a property and negotiate a purchase at $300K all up
3. The company issues 60,000 $1 fully paid shares to you in return for $60K in cash. This will form a deposit.
4. You arrange finance in the company's name for $240K secured by the property but no personal guarantee.
5. The company buys the IP using $60K cash + $240K borrowed funds.
6. You invest another $20K into the company to finance renovation. At this point you've got 80,000 shares.
7. After renovation the IP is worth $360K with $240 owed to the bank.
8. You find a buyer and sell all your shares in the company for $120K ($360K-$240K).

You made a nice profit of $40K on $80K invested. If you held shares for more than 12 months you can claim a 50% CGT discount.

The buyer bought a property without stamp duty and with finance in place.

Although I can see minor drawbacks, such as some running costs associated with the company structure, I can't see any major flaws. Please feel free to scrutinise the idea.

Cheers,

Lotana

 

[agent007]

It would be interesting to see how the bank would treat such structure since "virtually" everyone could adquire a property (co) with a minimum deposit regardless whether that person has an income or not....
Also, what would be the implications of -ve gearing for the person buying the co?

PS. I like the idea

 

[DaveP]

Maybe we need the expert advice of Steve N or similar....

 

[New Dad Soon]

have tried this direction...... you gotta get around 'beneficial ownership'........

 

[Lotana]

NDS,

Can you please elaborate on this?

Cheers,

Lotana

 

[JoannaK]

Lotana,

the first thing that springs to mind is why would the bank let you get away with no personal guarantees?

If the company has only been around a short time, and is merely just a shelf company, if I were the bank, there'd be personal guarantees there.

the other thing is that I think there is capital gains tax on selling a business (but i'm not sure about an actual company) and stamp duty when purchasing (i could be wrong so perhaps someone can confirm this).

the third thing - a solicitor would be vary wary of you buying a company from someone else - if it were a legitimate business, then your personal company would buy the business, but actually buying a company does involve a certain degree of risk. for example, just say FlipWrap did 2 transactions. The first was completely unrelated to the second. The second transaction was the actual sale of FlipWrap with the property. Just say that 3 months down the track the person involved in the first transaction for whatever reason decided to sue FlipWrap 142 P/L. It's been my belief that the person who eventually purchased FlipWrap would be the defendant in any lawsuit.

I could be wrong though.


The other way that may work is if the purchaser wanted to establish their own company and become a part owner or shareholder of FlipWrap then gradually increase their ownership or shareholdings.

 

[NigelW]

Lotana

The legal fees might eat into the profit line a bit!

There's a reason why a sale of business contract is a lot more complicated and negotiated over than one for sale of a house.

Previous posters have touched on some of the issues.

You'd need to give certain warranties as seller.

On your figures it would not be an issue, but remember also land-rich stamp duty would be payable on transfer of the shares if the value of the property was $1m+ and that comprised 80% of the assets of the company (excluding all sorts of intangible assets)...

The OSR are wise to your tricky ways!

Good thinking though.
Cheers
N.

 

[Carmel]

I like the thinking too.

The 2 flaws I see at the moment are:

1. difficulty in buying IP in the first place without personal guarantees. Banks/financial institutions etc. hate dealing with an entity that hasn't been going for at least 2 years (as something like 80% of businesses fail within the first 2 years, there's a reason why!)

2. Capital gains tax - certainly think it applies to selling the business, & surely, the business was worth more when sold than when started."FlipWrap # 142" wasn't worth zilch when started.
If after renovation the IP is worth $360K with $240 owed... so now it's worth $120K more than it was before (sounds like a cap gain to the business.... )