Development profits for serviceability?

Discussion in 'Development' started by adam duckworth, 2nd Jun, 2023.

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  1. adam duckworth

    adam duckworth Well-Known Member

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    Say I bought a site, subdivided it and Put two houses on it side by side. Profited $200k, how can I use that profit as income, so I can service my next development? Instead of it being a capital gain. I assume you can’t use cap gains as serviceability?
    If I bought it through my company, and sold it through my company, can I use the profit as income then instead of cap gains?
    Thanks guys.
     
  2. sanj

    sanj Well-Known Member Premium Member

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    If you haven't sold it you haven't profited at all. Also, capital gains cannot and should not ever be used to fudge income figures, imagine if the same was done during downturns?

    Regarding using your company etc? I don't see how you can now, legally, buy it off yourself and sell it for a profit without buying it for a price that's artificially low in order to be able to show 200k profit over a short period

    On top of that, you are going to Incur stamp duty, depending on the circumstances maybe gst and income tax in your own name, then tax again in your companies name, all to end up likely worse off than you are today, without even taking into account the potential risks of playing funny buggers with the ATO and sale prices/profits from your project
     
  3. Morgs

    Morgs Well-Known Member Business Member

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    With this sort of stuff you should get specific tax advice and credit advice as there is lots to unpack and consider.

    In theory with 2+ years ABN and financials then yes you may be able to look at profit for servicing. We have done with with our own development business.
     
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  4. Terry_w

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

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    It you bought subdivided and sold it would be taxed as income and not capital gains.Income in theory could be used for serviceability, but under residential lending they would not like to lend for a new project.

    You could structure it so that you are not seen as 'owning' it and only receive a wage - which would mean you need someone outside
     
  5. adam duckworth

    adam duckworth Well-Known Member

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    okay, so i could buy it in my companies name, which has been trading for 4 years, in the construction industry, and the profits from the development can be used for servicability for the next one? How do full time developers do it? How do they service loans through their development companies? and does that company just pay corporate income tax on that profit, and not cap gains. this is interesting to me so thanks for the replies
     
  6. adam duckworth

    adam duckworth Well-Known Member

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    i think you have misunderstood what i was saying? i never mentioned buying off myself. the company will be buying the land, subdividing it and building on it, then selling. my personal name wont have anything to do with the transaction except be the director of that company
     
  7. adam duckworth

    adam duckworth Well-Known Member

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    also, is that with doing it in my name or my company name?
     
  8. Terry_w

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

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    There are probably about 20 different ways to structure something like this. For development loans income may not even relevant in some situations.
     
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  9. Anchor

    Anchor Well-Known Member

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    Can you give some generic examples please, where income is irrelevant for development loans.
     
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  10. adam duckworth

    adam duckworth Well-Known Member

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    yeaj okay. Would you be able to give an example of the most common ways. Feel free to inbox me. I’m looking to put an offer in on this block for exactly what I described
     
  11. Terry_w

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

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    Company developing a property by getting a loan based on end value with the loan being enough to cover the costs. It might or might not be necessary for previous experience.
     
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  12. Terry_w

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

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    You should seek your own legal advice, well in advance of putting offers in.
     
  13. sanj

    sanj Well-Known Member Premium Member

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    Sorry you're right I did misunderstand...
    I thought you had already bought the land and built the 2 units and were now considering doing the 2nd half of your post, ie buying it in your company and selling it etc. Apologies from my end
     
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  14. gach2

    gach2 Well-Known Member

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    I think your OP is worded not the best but I think I get what your asking.
    Company buys land, subdivides and builds 2 houses and sells for 200k profit. Don't think it matters on the entity but on face value it looks as though the intention was to develop and profit hence its income (will also be subject to GST etc)

    Can this be used for serviceability. Technically yes but its not always simple. I know during covid it wasn't easily accepted as development profit was not considered consistent (not sure if thats still the case)

    How others do it. Mainstream lending doesn't usually cover development and most lenders have limits (2-3 on a title). Lot of people in this space usually use a day job to cover their developments etc. There are other types of lending (private asset based etc). Higher risk, higher interest rates but sometimes considered the cost of developing. If you can stick to mainstream lenders with low rates this might give you an edge when competing with other developers for same sites.
     
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  15. Morgs

    Morgs Well-Known Member Business Member

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    I'd assume most of what you're seeing with development funding isn't based on having finance that requires servicing. They'll be using niche development lenders (e.g. La Trobe) or private lenders. Experienced developers with the right CV / financial position will have access to more mainstream lending or be able to source their own capital through other means.

    If using normal residential lending/security then they can look at servicing based on your overall position; combination of PAYG/salary (if relevant) plus company nett profit and applicable add-backs. The tax answer depends. You'll need to talk to an experienced accountant.
     
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  16. Redom

    Redom Mortgage Broker Business Plus Member

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    Hmm its harder than one thinks, if your doing development after development after development - and want to use that income for resi lenders - many resi lenders aren't really going to look at you super favourably.

    Sure, you may tick all the boxes, but they may not want it (especially if in structures).

    For these deals, they do like seeing income come from other sources - it helps for standard resi lending (construction of duplexes/tris).

    Will definitely help get funding options though outside resi space. Being a profitable developer opens up funding sources, showing it year on year makes those funding options more flexible and cheaper. The really big players access insto funding much cheaper than riskier characters.
     
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