Small Subdivision Opportunity

[AndrewScottMusi]

From the ATO web site: "if you purchase land to subdivide and resell for a profit, or use the subdivided land in a business-like way, the proceeds may be treated as ordinary income and you may need to register for GST."

My understanding is that the project described above would definatelly be deemed as 'a buisness like manner' since it is purely for realising profits, so subject to GST and income tax (yay, I love paying tax

So of the $99,536 profit, 1/11th of the margin would be payable in GST (using the Margin Scheme) so loose = $10,949 to ATO

Then the remaining $88,587 is subject to normal income tax
(assuming the OP has a day job earning the Aust Ave wage of $72,00, bringing total taxable income to $161,387 which is in the 37% tax bracket plus 1.5% medicare levy) so loose another $34,106 to ATO

Total cash in hand from this project= $54,481 (10.3% return on all money in $528,464)

Howz my math?

The agent says no GST is payable on the sale.
But, it's such a vital issue that it behooves me to call the ATO and grill them. It's on my to do list.

 

[MRO]

I think your chicken and pig analogy is flawed.
If I walk away from the deal, it is I who is left with nothing, not the investor. The investor still owns the land plus the value of all the approvals I have achieved up to the date of my exit. If I leave prematurely then I have wasted all my time up to that point for no return. The incentive for me to stay is pressing. As for the investor, of course there is some risk, but if the deal is sound then it's hard to see how they could lose. The joint venture agreement would allow me to be replaced if I don't/can't perform.

The investor is in the game for $400k. What if you have missed something and it cannot be developed. Unlikely but possible. So the investor has some portion of $400k at risk plus the opportunity cost if he is stuck in a poor investment for several years.

You have lost nothing except a little bit of time. The time required to manage a 2 lot subdivision is minimal. Probably a full week of time spread over 1 year. The fact that you know nothing about GST makes me wonder if there is anything else you have missed. I would be surprised if any investor would hand over their cash to a untrained and inexperienced developer but good luck with it. I like the advice above to get an investor to loan you the deposit and let you finance in your own name. Both have a vested interest and no one can walk away.

 

[MRO]

The agent says no GST is payable on the sale.
But, it's such a vital issue that it behooves me to call the ATO and grill them. It's on my to do list.

No GST payable on the sale refers to the Vendor who is currently selling. Once you subdivide and sell (assuming business income) you will need to collect and pay GST on your sale proceeds and you will probably be able to use the margin scheme to do this.

 

[MRO]

Thought I would add - real estate agents aren't usually the best source for tax advice but in this case I assume they are talking strictly about the property that they are selling rather than the project and sale you are contemplating.

 

[AndrewScottMusi]

The investor is in the game for $400k. What if you have missed something and it cannot be developed. Unlikely but possible.
.

What sort of thing could I have missed?

 

[mattnz]

I am currently managing 3 JV developments and have experienced many of the high and low points through each of them.

My general advice for people is that if you haven't done your own development first, you shouldn't be managing a JV with someone else's money.

 

[sanj]

It's also possible that I've overestimated the costs and underestimated the subsequent market value, so the profit could be higher.

i can only go off the figures you have listed. ultimately almost anything is possible, but what is probable is that you are going to cop it if you do not have any contingency in any development let alone your first.

 

[Player]

I am currently managing 3 JV developments and have experienced many of the high and low points through each of them.

My general advice for people is that if you haven't done your own development first, you shouldn't be managing a JV with someone else's money.

What Matt says is spot on.

ASM, I could be wrong, however it doesn't sound as though you are seasoned in this style of project managing process. On that basis, it would be less than prudent to involve other's investment funds/equity to undertake such a subdivision IMO.

 

[Shaneelastic]

Why dont you do it yourself?

 

[AndrewScottMusi]

My general advice for people is that if you haven't done your own development first, you shouldn't be managing a JV with someone else's money.

Hmm, sounds like the old merry-go-round job interview.
Employer:We can't hire you because you don't have any experience.
applicant: How can I get experience if no-one will hire me?

 

[mattnz]

Hmm, sounds like the old merry-go-round job interview.
Employer:We can't hire you because you don't have any experience.
applicant: How can I get experience if no-one will hire me?

Its a tough one. How much cash do you have to invest and what is your serviceability like?

I have created a series of videos outlining the kinds of developments that I would suggest people start with (and how to use RP Data to find them). They are relatively low risk and much easier to finance than what you are looking at.

Note that the website mentioned in them won't be live for a few more weeks, (almost there though). When live, it will focus alot on these kinds of issues and how to mitigate risk when starting out as a developer.

1. 2 lots on 1 title http://www.youtube.com/watch?v=perF03avcZw
2. Corner blocks http://www.youtube.com/watch?v=UpGb0oU3D0Y
3. Battleaxe blocks http://www.youtube.com/watch?v=KjPz0rESi8E
4. 2 street fronts and duplexes http://www.youtube.com/watch?v=Jrep25mKotI

Hope this helps,
Matt

 

[sanj]

Hmm, sounds like the old merry-go-round job interview.
Employer:We can't hire you because you don't have any experience.
applicant: How can I get experience if no-one will hire me?

you should not be learning from scratch on other peoples money. someone trusting you with their money is a very big thing and you owe it to them to do your absolute best. doing your first development with someone elses cash is completely wrong imo.


nothing to do with the old merry go round. do one yourself first, even a small one and only then decide if you want to take it further and possibly involve someone else. you are genuinely asking for trouble approaching it the way you are atm.

 

[AndrewScottMusi]

Why dont you do it yourself?

I couldn't stand the stress of waiting for things to happen whilst the interest was accruing.
I'd rather offload that experience to someone with stronger nerves, in return for less profit for myself.

 

[mattnz]

I couldn't stand the stress of waiting for things to happen whilst the interest was accruing.
I'd rather offload that experience to someone with stronger nerves, in return for less profit for myself.

To me that is a bit of a concern. I have developed a questionnaire which allows people to assess if developing is likely to be the right wealth creation strategy for them. One of the questions that I have included in the self-assessment is the ability to handle a moderate level of risk. It is an essential inherent quality that a good developer must have.

Personally I find it more stressful having to manage someone else's money and be answerable to them. When things go wrong or are delayed, it is harder to advise someone else, than it would be to simply deal with it yourself.

 

[oc1]

Personally I find it more stressful having to manage someone else's money and be answerable to them. When things go wrong or are delayed, it is harder to advise someone else, than it would be to simply deal with it yourself.

I'm in furious agreement with Matt here. Wouldn't you want to know the pitfalls in development via experience before you deal with others and their money? When things go well everyone is naturally happy. It's whether you can overcome any adversity and see the development through to the end - that is the key.

Oscar

 

[AndrewScottMusi]

. someone trusting you with their money is a very big thing and you owe it to them to do your absolute best.

I agree, it's a big responsibility. That's why I'm submitting my plan for review in this forum

. do one yourself first, even a small one ....

This is a small project.

 

[AndrewScottMusi]

... what is probable is that you are going to cop it if you do not have any contingency in any development ...

By contingency, do you mean what happens if there's a flood, or a fire, or if I die?
What sort of events are you referring to?

 

[AndrewScottMusi]

I'm in furious agreement with Matt here. Wouldn't you want to know the pitfalls in development via experience before you deal with others and their money? When things go well everyone is naturally happy. It's whether you can overcome any adversity and see the development through to the end - that is the key.

Oscar

The reason I have asked this forum's opinions is to learn about pitfalls through the experience of others, rather than myself. In this way, adversity can be averted, or at least, budgeted for.

 

[mattnz]

By contingency, do you mean what happens if there's a flood, or a fire, or if I die?
What sort of events are you referring to?

A cost blowout
Unexpected expense
Sales values drop during the project
Timeframes blowout

You can estimate as well as possible, but will find that things will often cost more than you expect and take longer than anticipated, especially for a first development. Thats what you have a contingency for. If you were seeking a bank loan for it, they would require a contingency of 5-10%.

 

[AndrewScottMusi]

... is the ability to handle a moderate level of risk. It is an essential inherent quality that a good developer must have.

Personally I find it more stressful having to manage someone else's money and be answerable to them. When things go wrong or are delayed, it is harder to advise someone else, than it would be to simply deal with it yourself.

What one person considers to be a moderate level of risk, another may consider to be extreme. And a 3rd person may consider the risk to be negligible.