Selling off the plan - Profit margin

[hb40]

Hi,

I am looking to sell some apartments in Melb off the plan.

I am trying to work out the expenses/profit margin roughly.

My understanding is that:

- 2%-2.5% to RealEstate agent (paid on sale out of my pocket pre settlement?)
- 10% of settlement price is paid to gov in GST (but then I get back the GST from the build?)
- Council contribution on finished build pre settlement?
- Tax on net profit at the tax rate? (split the sales over two financial years to minimise this?)
- Any other costs to consider?

Thanks

 

[Aaron_C]

You only have to charge GST / claim back GST if you are registered for GST or required to be registered for GST. So if you are, the actual amount of GST payable to the government is not just 10% of the price. If you are using the margin scheme, it is 1/11th of the 'margin' - the difference between the sale price and the land acquisition price.

If the margin scheme is not used, then it is just 1/11th of the sale price.

The only way to defer tax on the net profit is to sell just enough units/apartments to cover all your costs, and keep the rest of the units for yourself and sell them in different financial years. However, this may have other consequences (if GST is involved) such as change of creditable purposes so you may have to refund some of the GST you claimed back on the building costs.

 

[hb40]

Aaron that's really helpful. Can I ask...

1) Under what condition do I need to be registered for GST?

2) If I am not registered for GST, then I don't have to pay GST to the gov for apartments I sell, so no GST is payable?

3) If I'm not registered for GST, what is the catch? I don't get back the 10% GST on the build costs? so let's say the build is $2mil ex-GST, then I'd be paying out $2.1mil, and I can't claim back the $100k in GST?

4) Regarding deferred tax, so let's say the numbers are:
- Land cost is $680k (purchase price) + $30k in fees
- Architecture and townplanning costs $100k
- Build cost $2.1mil
Total cost: $2.91mil

If I sell $2.91 worth of the apartment block (let's say 2/3 of the apartments), and keep the remaining 1/3, (ignoring GST for now), then I don't have to pay any capital gains tax as I didn't make a profit?

5) I'm guess the banks to finance the project will want me to cover in upfront off the plan sales the total cost of the land and build ($544k in loan on the land + $2.2mil in design/build = $2.74mil) ? or is there a sliding scale?

Many thanks in advance

 

[Aaron_C]

1) If you are in business and turnover is over $75,000.
2) Yes, No GST is payable.
3) Yes you will have to pay full GST on the build costs and cannot claim a refund.
4) It's a complicated question because each apartment you sell will have costs apportioned to it. So if you have 10 apartments and your total costs (land+build) was say $3m, then simplistically the cost of each apartment is $300,000. So if you sell each apartment for $400,000 then you will make a capital gain of $100,000 on each apartment, no matter how many you sell. You can only defer paying tax if you use the trading stock provisions in the Income Tax Acts rather than using capital gains.
5) Financing for this project is a bit complicated - best to speak to your broker about it but generally speaking the bank will require pre-sales to cover all debt before they would consider lending you money to fund construction.

 

[hb40]

Gst

Thanks again Aaron.

I totally understand that it's a complicated matter and it will differ from case to case. But you're managing to dumb it down sufficiently for me to get a slight handle on it

Also I note that I will consult my accountant before I do anything and I'm not asking you for financial advice.

1) So with GST, I'm either paying around 10% of the construction cost (if I'm not GST registered), or 10% of the finished value. So in theory if I only sell enough apartments to cover the costs, the GST payments will be similarish regardless if I'm GST registered or not. Is that about right in theory?

2) Regarding capital gains tax, assuming I am doing the development under a trust, how would the sales be taxed theoretically? I assume it will be distributed amongst the trust shareholders as disbursements which they would pay tax on individually? A trust seems to be the simplest way to protect myself from a failed project and to try to reduce the tax.

3) The trading stock provisions in the Income Tax Acts sounds interesting! I realise I'd need to talk to an accountant about this, but at a high level, how do you end up paying tax under this structure?

Thanks

 

[Terry_w]

For a development you probably wouldn't be paying CGT. The income may fall into either revenue account or trading stock.

You need expert advice on structure before you buy for a number of considerations such as:
- stamp duty
- land tax
- deductibility of interest
- GST
- asset protection
- long term goals
etc

 

[Aaron_C]

Terry is right. The trading stock provisions treat the development like any business that has stock/inventory, like a milk bar. That means that you no longer get the capital gains discount when you sell any property. All income becomes 'business income' which is fully taxable. However, the flipside is that you get different types of deductions - mainly deductions for differences between opening and closing stock (which is the land). Also, expenses are not added to the cost base like in capital gains but are immediately deductible.

However, before you even consider trusts/companies etc you really need to work out whether you are working under the capital gains tax system or the trading stock system. It is a crucial element that will dictate everything.

 

[hb40]

ok

Ok. That gives me some good guidelines for when I talk to accountant/advisor.

Here is the rough breakdown of costs/sales/profit based on some of the information you provided:

Build & Land Costs
===============
Land & settlement fees: $710k (borrowed $544k)
Town planning and Architecture costs: $100k
Architects managing the contact: $40k
Sales agent fees (2%-2.5%): $100k (assuming selling all apartments)
GST on sale price or on building (depending on whether GST Registered): $240k ?
Construction costs (Design & Construction contract?): $2,640,000
Stratta Titling costs ($16k per apartment?): $192k ?
Council contribution: ??
Holding costs (12 months on 1/2 $3mil): $100k
Deductability of interest: (tbc)
Land tax (as per current, owned by me personally): neglegible

TOTAL COST: $4.2mil ? (Total borrowed: $4mil)
End Value: $5.4mil ?
GROSS PROFIT pre tax: $1.2mil ?
TAX ( depends on whether working under the capital gains tax system or the trading stock system, and how many apartments I sell/keep): ??


Have I missing many things?

I am trying to work out whether the project is worth it before I go into next architecture stage and marketing. I think the key is going to be working out how to minimise tax at the end otherwise all the hard work will be for paying the tax man!

My aim is to keep as many of the apartments as possible so maybe that will help me minimise the tax.

thanks

 

[Aaron_C]

The costs look about right. The issue is that you are holding the land in your personal name. So if you do the development from now on it will have large tax implications unless you change structure now. For a development of this scale the ATO may classify this as a development business (trading stock provisions), which means that a trust/company structure would be more appropriate to minimise the tax paid. However, transferring the land to another entity now would involve stamp duty, so you need to weigh up the costs/benefits of doing so.

For myself, I am developing through a unit trust and applying the trading stock provisions. This will allow me to keep a few of the finished properties without paying income tax, and allowing a progressive sell-down over time to minimise the tax paid. The downside is that I do not get the CGT discount, but mine is definitely a 'business' so capital gains do not apply.

 

[Kamak]

Are your "holding costs" including your interest?

What is the block worth with an approved DA? Is that a point where you look to exit?

 

[hb40]

holding costs

Hi,

the holding costs I list here are only my interest. I estimated over the 12 months of build I will be paying Interest Rate x Total Cost (build/land) / 2 (since it's progressive build payments).

Are there other holding costs aside from interest? *gulp*

I would be amazed if there aren't other costs or "consultants" somewhere along the line They seemed to come out of the woodwork when I was doing town planning. Bins managment plan?! what the.

thanks.

 

[wobbycarly]

Hi,

the holding costs I list here are only my interest. I estimated over the 12 months of build I will be paying Interest Rate x Total Cost (build/land) / 2 (since it's progressive build payments).

Are there other holding costs aside from interest? *gulp*

I would be amazed if there aren't other costs or "consultants" somewhere along the line They seemed to come out of the woodwork when I was doing town planning. Bins managment plan?! what the.

thanks.

Other holding costs (probably trivial in the scheme of things):
- Insurance(s)
- Water rates
- Council rates
- Electricity