Ways to structure business of buying, renovating and selling properties in Trust

[AGM1]

Your insight would be appreciated based on our goals and understanding.
We are interested in getting into business of buying, than renovating and selling the property within no more than 6 months of purchase. We got different advises from different accountants in regards to correct ways to structure it.
Our current accountant suggested to create a company as a trustee within Discretionary Trust if we operate as a business. We will be borrowing money from a bank to start our projects. We also found a right property with great potential to produce positive income.
What would be your opinion on this type of setup? Is there any capital gain tax, land tax or any fees and if so how much? We believe there is no Capital Gain Tax as this is run as a business.
1. What happens if we decide to keep some properties for more than 12 months and have rentals?
2. What happens if we realize that this business is not for us and we do not want to do it anymore? What happens with money and properties in the trust?
3. Is it better to start under your own name/abn and if business picks up than create DT and start buying properties under it?
4. What are the ongoing fees for maintaining company and trust?

Thanks,
Aleks

 

[Terry_w]

This will depend on several things
- your personal income
- your partner(s) personal incomes
- state of purchase, now and longer term
- existing properties owned, and how
- serviceabiity
- long term borrowing plan
- asset protection risks
- succession aspects
- existing cash

etc
You will need to consult with a lawyer on the legal aspects such as who should be director, structure of the trust, terms of the trust, who takes what role, asset protection from beneficiaries of the trust etc.

 

[Terry_w]

1. What happens if we decide to keep some properties for more than 12 months and have rentals?
2. What happens if we realize that this business is not for us and we do not want to do it anymore? What happens with money and properties in the trust?
3. Is it better to start under your own name/abn and if business picks up than create DT and start buying properties under it?
4. What are the ongoing fees for maintaining company and trust?

Thanks,
Aleks

Answers
1. The rent will be taxable to the owner. If a trust the income will flow through to the beneficiaries after deductions

2. This happens - ownership will be expensive to change. Properties in the trust will remain in the trust. Money in the trust will be subject to the terms of the trust
3. depends
4. Company = $243 per year in ASIC fees
Trust = annual tax return - cost will vary depending on what the trust does.

 

[Paul@PFI]

Yes - Forget capital gains tax.
1. Selling within a year is first issue; but then
2. Its ordinary income as the nature of the income is business income if its intended to be repetitive and/or the intent is to buy, fix and sell...Never a CGT issue. If you decide to hold and rent then I would doubt that the CGT provisions would apply as your first intent was to fix and sell.

Are you related parties ie spouses ?? If not, a Discretionary Trust may be a very poor entity. Bringing another in later is problematic.

GST may impact if the property is not resi when you acquire it but it is when you sell it. Stick with old homes and there wont be a issue.

Ongoing costs - I'm sure the accountant would have indicated this but the company + trust setup incl all tax regn etc would be around $1500. Therafter annual co costs $250 + Annual tax etc for the trust around $1100++ Operating a trust isn't that simple...For example forgetting to resolve who to distribute to could mean a punitive tax rate of 49%. Also if the only beneficiaries to distribute to and you + spouse there may be very poor outcomes from the trust. And as Terry mentions liability issues too.

Many lenders aren't fussed with a trust and others are...The Trustee Directors would normally give a personal guarantee on top of the mortgage. So its comes with some asset protection issues that might be a concern...as Terry mentioned.