I'm often asked by budding developers about how they can develop a site then live in one and use the main residence exemption when they live in one for three months or more. Nice tax saving opportunity ? Then a while later (3months +) they seek to sell....CGT exempt ? Sweet..... No. They should read Tax Ruling TD 92/135. This ruling expresses the ATO view that if the development results in ordinary income that the developer cannot also rely on the main residence exemption. The key here is the selling. Avoiding sale and residing in and holding the asset (very) long term may help to distinguish the asset as being held on capital account. The time that the property is lived in is essential also. The CGT absence rule may not operate either where the asset is not occupied for a long term.
Hi Paul, Thanks for the link. The example provided in the Tax Ruling TD 92/13 is that of an owner/builder (someone who earns their main income from within a relevant industry) therefor classed as ordinary income. Yes? Those outside the industry, that earn their ordinary income elsewhere, would not be at risk of this ruling. Yes? So the key here would be the means by which you earn your ordinary income, and not the selling nor the length of residency as you have suggested. This isn't to suggest that your length of residence would not be taken into account in the event if this ruling, but this ruling would be irrelevant to anyone earning their ordinary income outside the housing/property/real estate industries. This is my understanding. Can anyone else comment?
Turbo_C's answer is technically correct but it is not the whole story. If you want to keep one as a PPR then you would need to do the deal in your own name and that would be dumb. Your intention from the outset is key to determining your tax liability so your plan to sell one would mean that any profit would be income tax assessable in the names of the developers. You could keep one as you suggest and on this point I agree with Turbo_C, just by posting on this site you have declared your intention to sell the one you hold. There would be no benefit in selling in 3 months simply because the ATO would rule against it being CGT. If you hold it for more than 12 months you may get around that problem but consider how much you will lose selling a second hand product with all the holding costs rather than a new home. By doing the deal in your own name you risk all of your assets if there are problems. By doing the deal in a trust you get all your assets protected and you are able to distribute the profit in a way that will maximise your tax at 30%. You would still be able to get a CGT exemption by signing a 99 year lease with your trust and calling the property your PPR. When the trust wants to sell the property it would need to buy you out of the lease and that payment would be tax free.
Personal guarantees are necessary to secure a bank loan but that is the limit of your exposure unlike a law suit. I would assume that the amount of any loans would be offset against the value of the assets you are buying. There is limited risk to your personal assets and that would be non-existent if you do the financial feasibility correctly.
Terry I'm not sure I understand the question so I will put it this way. Anyone doing a development, or even buying an investment property, should be doing it through a discretionary trust with a corporate trustee, no exceptions. This separates your personal assets from your business assets. If you are sued personally then your business assets are safe. If the trust is sued then your personal assets are safe. This is asset protection 101, investing in your own name is dumb, the objective is to control everything and own nothing. Negative gearing is even dumber.
Hi John I wouldn't say that everyone should use a corporate trustee, but asset protection should definitely be considered and developing would be very risky. But holding assets in a corporate trustee doesn't mean your personal assets are protected, it just means they are less at risk. This is for 2 main reasons - 1. If the project fails the bank will call on its personal guarantee and 2. directors are sometimes liable for a company's debt. One other aspect not often considered is what happens to trust assets of death - asset protection in death. See my legal tips on asset protection in the legal section for more info.
But if you were not directors there would be great asset protection - as no director liability and no personal guarantees. But you would have loss of control and different asset protection issues in that case.
Having assets owned in a trust with a corporate trustee (personal trustees mean that the trust is useless) when the Corporate Trustee does not trade gives an absolute guarantee over your personal assets if someone were to sue the trust. For example, if I have an investment property owned in a trust and they sue, they sue the trust, not me so my personal assets are secure. If the trust was not able to satisfy the judgement against it, the litigant would be able to sue the trustee but the trustee is a $2 shelf company with no assets. Regardless of whether I own assets in my own name or not, if I want to borrow money I need to give a personal guarantee. The trust does not offer any protection against the banks, all they want is the loan paid out, they are not suing because I was criminally negligent. The directors of a company are only personally liable if they act fraudulently or they trade while insolvent. The corporate trustee of a discretionary trust should never trade, should not have an ABN or a tax file number. It does nothing and therefore these conditions will never arise. If I am sued personally I have no present legal entitlement to the assets of the trust so they are protected from any litigant. On my death the assets of the trust do not belong to me so they are not subject to the conditions of my will. I can however will the position of appointor of my trust so the new appointor can replace the trustee and take control of the assets of the trust. This is asset protection at it's best.
John - you are obviously not a lawyer but sound like an accountant. 2 aspects of your post trouble me 1. willing the appointor position - fraught with danger. What if the will is invalid for example. This is best done via other means such as hard wiring it in the deed or via a deed of appointment. 2. And "The directors of a company are only personally liable if they act fraudulently or they trade while insolvent." there are many other ways a director can be personally liable one of which is breaches of OHS laws. Other than that I largely agree.
Terry, I am neither an accountant or a lawyer but I am an experienced property investor and developer. I don't agree about the will and the appointor but each to his own. Having it hard wired in the deed makes it difficult if the appointor is a real person because they may die before you. A deed of appointment may work. The best plan would be to appoint a Co-appointor before your death so that there is no interruption and no loss of continuity. I agree with the OHS thing but again, the trustee company is not trading and this should not occur.
Hi John, sounds like you have good knowledge for a lay person. OHS can be a real issue if you are developing with lots of accidents happening on building sites.
OHS is a problem but only if the developer is doing the subcontracting. If a builder is engaged then the OHS liability will rest with them. Either way, the issue of asset protection only comes into play when you do something that the insurance companies will not cover at that is generally when you are criminally negligent. Then you deserve everything you get.
Non-existent, Yes! but don't overlook the bit that follows "if you do the financial feasibility correctly". This is where most investors fail. There is no secret formula here but all investors need to realise that regardless of your strategy you are producing a product, either to rent or to sell. The "Product" needs to be the right product, in the right place, at the right time, and for the right price. I have written a document about this very subject and it can be seen at https://drive.google.com/file/d/0B-vEWrt-d9lsUDZGYVh3TlFicFk/view?usp=sharing Good luck!
