Developing and holding/selling from trusts - QLD

Discussion in 'Accounting & Tax' started by Bris Jay, 11th Dec, 2020.

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  1. Bris Jay

    Bris Jay Well-Known Member

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    I was discussing with my accountant the best way to structure the next splitter project in Brisbane and he suggested we consider purchasing it in multiple trusts as tenants in common. The logic was:

    My income has me just under the 45% threshold after deductions and I have 2 IPs in my name so I'm already getting hit with land tax and the rates just keep increasing.

    My wife is just into the 37% tax bracket so has a bit of room before hitting the next bracket and also only had our PPOR in her name so no land tax at this stage.

    Our splitter project is to build two new houses will likely result in the following:
    Year 1 - heavy loss
    Year 2 - Sell one house for a bulk profit
    Years 3 - 8 - rent out remaining house - Small loss due to depreciating asset
    Years 8+ small to medium positive gearing

    It works best for me to claim the losses and my wife to claim the profits but obviously that's not possible. By utilising two or three trusts, we wouldn't pay any land tax as we could keep all trusts under $350k UCV as tenants in common and we could hold the year 1 losses to offset against the year 2 gain. We can then disperse the profits in year 2 between us as per our tax bands.

    The cons that I see here are that it kills the cash flow in year 1 and we can't utilise the small depreciation in years 3-8 to offset against my income.

    Is there anything that I'm missing and is this a good option or am I overcomplicating things?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Lots you are missing, what you need is legal advice, but it might be the way to go.
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Unusual. I cant say I have ever advised anyone to use multiple trusts for unrelated interests. Seems very expensive and complex. You havent indicated what sort of trusts. Its potentially a land tax issue for retention. Inability to use neg gearing should be a consideration.

    Of course GST applies to the one sold.

    Lenders may have some issues with this structure.

    The Y1 loss is likely due to newer tax laws which deny all deductions during build until its completed. But that shouldnt mean a large loss since its non-deductible. Otherwise reason for a large loss doesnt make sense.
     
  4. Bris Jay

    Bris Jay Well-Known Member

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    The Y1 loss is probably going to depend on what time of the year it all falls. If the build was completed in May and sold in July then essentially we would claim the loss in the first FY and then the gain in the second FY. That is unless the new tax guidelines allow us to wait until we sell it and simply increase our cost base regardless of when construction completes.

    I didn't ask what type of trusts and I've not used that structure before so I don't know the implication of different types of trusts. My understanding is that we would start 2-3 companies and each would have a trust.

    Putting the next one in my wife's name is likely the best solution as long as we claim Y1 deductions in the same FY as the sale of one of the houses. If not, she would be getting a refund in the bracket of 32.5% and then paying tax on the sale in the next year at 37%.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I'm confused why a loss would occur for one sale and a profit for another. Doesnt sound correct. At all.

    With devs all the costs defer so that the costs are then apportioned against the relevant construction lots (some may be shared, others wont) and offset the revenue from each sale when sold. I am referring to ex-GST costs of course. Typically the build will have a "work in progress" value only while the dev continues. GST timing and strategy is another element. Interest, rates etc used to be deductible when incurred but since 1 July 2019 all holding costs are deferred into the cost of the project and onlt truly become deductible when sold.

    The best strategy to avoid land tax is sale.