Townhouse Calculations

[RE rocks]

Can someone please review the townhouse calculator and advise me of the CGT and GST component to enable me perform early analysis for profitability of a development before engaging an accountant to validate the numbers.

can some experiences smart investors and builders provide input to the numbers $$$ which will assist beginners like me to understand more about the development analysis and gain more knowledge.

Any constructive crtiticism would be ok as i'm still in learning phase before i get onto any sortt of journey.

i'll be glad if people amend the spreadsheet and re-attach till we make it one of the super models to be included in SS Spread sheet collection
(Information resource)

Also not too sure why would I pay GST as I'm not running a business neither i am a builder

 

[Jonathon]

Manish

Firstly, if you want people to comment on your spreadsheet, it's probably best not to protect the worksheet.

Secondly, your GST calcs are incorrect. Your formula in cell D58 is adding and subtracting the wrong GST components.

You can only reclaim the GST you pay during construction if your intention is to sell them post construction, therefore you're in the business of selling houses and you have to pay GST on the selling prce, although the margin scheme may apply.

However if you apply the margin scheme, you wil llose less than 1/11th of the selling price.

Thirdly, it's highly unlikely that you paid GST when buying the original house for $406k, if it's a knockdown. therefore there's no GST input to reclaim.

Moreover, some of the (smaller) expenses you list won't have GST on them (rates, land tax, some council fees, financing costs, etc).


Finally, you haven't included income tax?

Cheers
Jonathon

 

[RE rocks]

unprotected townhouse calculator

Apologies..i should have unprotected the sheet right away

Thanks Jonathan you have been really helpful so far

Manish

Firstly, if you want people to comment on your spreadsheet, it's probably best not to protect the worksheet.

Secondly, your GST calcs are incorrect. Your formula in cell D58 is adding and subtracting the wrong GST components. ( Ok can you help me with that by making changes on unprotected sheet)

You can only reclaim the GST you pay during construction if your intention is to sell them post construction, therefore you're in the business of selling houses and you have to pay GST on the selling prce, although the margin scheme may apply. ( Can you elaborate please?)

However if you apply the margin scheme, you wil llose less than 1/11th of the selling price. ( Can you explain with an example)

Thirdly, it's highly unlikely that you paid GST when buying the original house for $406k, if it's a knockdown. therefore there's no GST input to reclaim.

Moreover, some of the (smaller) expenses you list won't have GST on them (rates, land tax, some council fees, financing costs, etc).


Finally, you haven't included income tax?

Cheers
Jonathon

 

[Jonathon]

Manish

The error in your spreadsheet is that the two gst amounts are being added when they should be subtracted and vice versa.

Ok here's a GST on development 101 - this is incredibly high level and absolutely needs to be discussed with your accountant before you do anything, sign anything, apply for anything, etc.

If you're building townhouses with the intention of selling them, you're carrying on a business and have to pay gst on the selling price. So if you sell the townhouses for $550k each, you have to hand over $50k each to the ATO. However, you will have reclaimed all of the gst you paid to the builder, architect, etc, but that will be a lot less than the gst on the selling price.

However, subject to some specific situaitons, the margin scheme may apply. If you buy a piece of land or a knockdown house for $500k, then build two townhouses and sell them for $600k each, so $1.2m in total, then the margin is $700k, ie the difference between what you paid for the site and what you sell it for. If the margin scheme applies, then the gst you pay to the ATO is 1/11th of $700k, rather than 1/11th of $1.2m, so saving you about $45k. You also get to reclaim all of the gst you pay the builder, etc.

If you develop townhouses with the intention of holding them as rental properties, you're not performing a GST activity and therefore can't reclaim the gst you pay the builder, etc. However, if you sell one or more of the townhouses within 5 years of building them, there's a chance that you may have to pay gst on the purchase price.

These two approaches - building to sell or building to rent are treated completely differently for tax.

If you build to sell, all revenues and costs are added together to see if you made a taxable profit or loss, which is taxed at your relevant marginal rates, or 30% if you're operating in a company.

If you build to rent and you're building it under your own name (rather than a trust) then the interest on all borrowings is deductible against your other income from the time you buy the land in the first place, as is land tax, rates, etc, but not any costs of building. Plus whenever you sell the townhouses, you only pay CGT on half the taxable gain, but this is worked out very differently from the build to sell method. However if you sell within 5 years of building them, you run the risk of the ATO saying your original intention was to sell, and that's a whole load of pain you don't want...although the rules in this space are changing at the moment.

Hopefully this hasn't confused you too much. It's a hugely complex area and you need to be very careful in how you approach your develoment and how you structure it, although if you've already bought the land then it's too late for that.

Cheers
Jonathon

 

[RE rocks]

my 2 attempts none accurate really need help

Hi,

I will soon be paying my first installment to the architect for town planning purposes.

i would really appreciate help in making changes to my calculator to help me understand this a bit better.

My Plan of attack after demolishing our existing PPOR is asbelow:

FOr first 12 months:

LIVE in my Townhouse (A) PPOR for 12 months
and rent out Townhouse (B) for 12 months

After 12 months:

Sell townhouse (A) after : No CGT on Sale as this my PPOR
Move into (B) after 12 months: Live in there for 12 months and sell 50 % CGT relief.

As far as GST goes, can you check my calculator and make changes and re-attach if possible. I would be really gratful to you or anyone who is willing to assist from their knowledge



Agaiin i'll discuss this with an accountant soon but just wanting to get some thoughts

thanks in advance

my other question:
http://www.somersoft.com/forums/showthread.php?t=55521

Manish

The error in your spreadsheet is that the two gst amounts are being added when they should be subtracted and vice versa.

Ok here's a GST on development 101 - this is incredibly high level and absolutely needs to be discussed with your accountant before you do anything, sign anything, apply for anything, etc.

If you're building townhouses with the intention of selling them, you're carrying on a business and have to pay gst on the selling price. So if you sell the townhouses for $550k each, you have to hand over $50k each to the ATO. However, you will have reclaimed all of the gst you paid to the builder, architect, etc, but that will be a lot less than the gst on the selling price.

However, subject to some specific situaitons, the margin scheme may apply. If you buy a piece of land or a knockdown house for $500k, then build two townhouses and sell them for $600k each, so $1.2m in total, then the margin is $700k, ie the difference between what you paid for the site and what you sell it for. If the margin scheme applies, then the gst you pay to the ATO is 1/11th of $700k, rather than 1/11th of $1.2m, so saving you about $45k. You also get to reclaim all of the gst you pay the builder, etc.

If you develop townhouses with the intention of holding them as rental properties, you're not performing a GST activity and therefore can't reclaim the gst you pay the builder, etc. However, if you sell one or more of the townhouses within 5 years of building them, there's a chance that you may have to pay gst on the purchase price.

These two approaches - building to sell or building to rent are treated completely differently for tax.

If you build to sell, all revenues and costs are added together to see if you made a taxable profit or loss, which is taxed at your relevant marginal rates, or 30% if you're operating in a company.

If you build to rent and you're building it under your own name (rather than a trust) then the interest on all borrowings is deductible against your other income from the time you buy the land in the first place, as is land tax, rates, etc, but not any costs of building. Plus whenever you sell the townhouses, you only pay CGT on half the taxable gain, but this is worked out very differently from the build to sell method. However if you sell within 5 years of building them, you run the risk of the ATO saying your original intention was to sell, and that's a whole load of pain you don't want...although the rules in this space are changing at the moment.

Hopefully this hasn't confused you too much. It's a hugely complex area and you need to be very careful in how you approach your develoment and how you structure it, although if you've already bought the land then it's too late for that.

Cheers
Jonathon

 

[Jonathon]

Hi,

I will soon be paying my first installment to the architect for town planning purposes.

Agaiin i'll discuss this with an accountant soon but just wanting to get some thoughts

Leaving it a little late, aren't you??? By "an accountant" can I presume that you haven't actually got an accountant yet?

If you rely on this board for help with your accounting issues you're running the very real risk of landing yourself is serious trouble with the ATO.

 

[RE rocks]

Hi Jonathan,

I will be hiring one but it'll be great if you can help and PM mer the updated sheets
Thanks in advance

Leaving it a little late, aren't you??? By "an accountant" can I presume that you haven't actually got an accountant yet?

If you rely on this board for help with your accounting issues you're running the very real risk of landing yourself is serious trouble with the ATO.

 

[RumpledElf]

An architect before an accountant? Have you actually looked at project builders *properly* yet to see if they do *anything* that can fit on your block/s? There's plenty of quite compact 2 storey designs out there for very small blocks.

Architect stuff tends to blow WAY out (a draftie + surveyor would be cheaper). Sure, you get better quality, but architects are generally better when you are trying to build The Best PPoR you can. Are you trying to make a profit on this or not?

 

[coastymike]

Dont worry Jonathan just update the spreadsheet and send it back so you can be sued if anything goes awry. Some people amaze me.

 

[Jonathon]

Dont worry Jonathan just update the spreadsheet and send it back so you can be sued if anything goes awry. Some people amaze me.

Not as amazing as getting an architect before an accountant! Or for that matter getting an architect for a townhouse development!

 

[RE rocks]

Hi

I am here to learn from my mistakes and nor sue people. I would like your opinion and would not hold anything against anyone.

At the end of the day, i will be going to an accontant to get my nmbers validated.

i just thought it'll be good to gain some more knowledge for my own understanding of how and where i am complelty off the track and need some clear direction.s

once again, i would appreciate any inoputs into the spreadsheet

thanks once again

Dont worry Jonathan just update the spreadsheet and send it back so you can be sued if anything goes awry. Some people amaze me.

 

[Minx]

Not as amazing as getting an architect before an accountant! Or for that matter getting an architect for a townhouse development!

I had to LOL there. Not only is this like the 6th thread about the mentone development, it's the same stuff over and over and he is yet to engage with an accountant!

 

[RE rocks]

I had to LOL there. Not only is this like the 6th thread about the mentone development, it's the same stuff over and over and he is yet to engage with an accountant!

Hi

I have another 3-5 months to do so before i get my townplanning permits approved.

Meanwhile i thought it'llb e good tog et some inputs

Thanks anyways

 

[coastymike]

Manish

The point some people are trying to make it that you have things backwards. Your calculations have a number of errors and I can see some costs that you have not included. So from the beginning of your development you have no idea about the true profitability of your project.

In my opinion this is poor business practice. If you had engaged someone to assist with your calculations from the beginning you would know your true profitability. At this stage you do not because your GST calculations are not correct.

Anyway good luck with the project and hopefully you will learn from this experience. This looks like starting a coffee shop without doing a basic cashflow analysis of the business before you start selling coffee. But too late because you already have the machines on order.