Flipping company?

My mate wants to set up a business flipping houses. We are in Perth and for a while this has not been feasible. However, there is a possibility that for a couple of years from (perhaps) 2018, that there is potentially some money to be made.

I was wondering about ownership structures of Individual Ownership vs a Company structure for a flipping business.

Possibly tax would be favourable in a Company structure. For example, if he made $100,000 in a year, at personal tax rates that would be ~$25k tax. For the Company, it would be $28.5k tax. However, he is a low income earner, so if the Company paid fully franked dividends at the right level per year, he could make use of the franking credits.

I am thinking if flipping is profitable for 3 years and he makes $300k but the Company pays out the dividends over 5 years, it would work out better than if he ran the same deals in Individual Ownership?

Just trying to think about the pros and cons of each approach.

 

Buying in a company structure vs. Buying in your own name? This might help before the tax/structure experts roll in.

 

Ok, interesting.

The 50% capital gains tax discount would not apply to a property held in an individual name for less than 12 months.

Further, if an investor was in the business of renovating and selling houses, capital gains tax would not apply at all.

I think some issues, like GST are not explored in the thread but some interesting info there. Thanks for the link!

 

also a good start here: Why it may be a good idea to use a company to own property thanks to @Terry_w

 

No CGT for flipping anyway as this would be on revenue account.

Generally a company with the shares owned by a discretionary trust would be a good start.

 

Thanks @Terry_w. I think it something worth getting good tax accounting and legal advice before exploring further. I am back reading your legal tips and threads now. Not much discussion on GST.

Legal Tip 55: A Company Owning Property

 

The company would be registered for GST.

In the first phase, flipping properties, presumably the GST on any goods or services purchased could be claimed back?

Say the company is successful and starts building houses. The GST charged by the builder should be able to be claimed back? If a property is sold then GST would be payable but may be eligible to be sold under the margin scheme. Legal and tax advice needed.

 

The entity wouldn't really effect GST. It is just like selling sex toys really. CGT on the sale price with GST claimed back on the expenses.

 

It would if the individual investor wasn't registered for GST, they couldn't claim back the GST on expenses. But then if they were in the business of renovating houses for profit they would likely be required to register for GST anyway.

What about building a house to hold to rent? If an individual does that, they can't claim the GST on expenses. Can a Company claim GST on expenses where it is building a residential investment property to hold to rent?

 

This relates to something @tobe, @Peter_Tersteeg and myself were discussing earlier in another thread.

How to calculate changes to your borrowing power

I was considering my mate, who is a low income earner and thinking about ways to boost his income for serviceability. However, I was thinking about that so he could buy properties to renovate to sell. It could potentially simplify his situation if he was conducting his business of flipping houses in the Company. Then he would not need to draw a PAYG wage to fund his property investment efforts.

This is my rough idea:

1) start out by flipping houses. this is only viable for a relatively short timeframe during the property cycle

2) when flipping becomes unviable, start building houses instead. these could be held for rental, sold for profit or a mix

3) invest in some commercial investment properties to hold for rental income

If needed, some profits could be distributed as dividends down the track.

 

Say all this goes really well and I want to invest in this company and become a shareholder (assuming I have the cash to do so), would it be complex to buy shares in the company? I am trying to think of all the questions to ask the tax accountant and solicitor.

 

If flipping properties, the property would be trading stock so the owner would probably be required to register for GST.

If buying to hold then GST could not be claimed on expenses.

 

No rather simple. You just have a contract drawn up with the shareholder and do the transaction and transfer title. Stamp duty may be payable by you and CGT by them.

 

How can he get the finance for the first few if on a low income?
maybe other shareholders and directors with high income can assist in servicing.

 

Someone who owes him one might loan the funds to the company.

A commercial loan agreement would be required, legal advice and tax advice.

The company would also have to be formed with a constitution that would allow it to borrow money I guess.

 

Don't forget to take a charge over the property (a mortgage) and over the company!

 

I was thinking of a loan instead of becoming a shareholder because of dividends.

Say if we both had a $100k each and formed the company each owning 50 shares. In one year I might have a high income and he might have a low income, so I would not want dividends but he might. I wasn't sure if the company can pay dividends to one shareholder but not another shareholder. Is that why you suggest that shares are owned by a discretionary trust and not individual shareholders?

 

Sounds like this is shaping up to have potential. Any idea how much I should budget for good advice? Note here that I would want good advice, not cheap advice.

 

Fees/cost does not necessarily have anything to do with quality? I know this one from experience

Don't want to rain on your parade but flipping works well in rising markets. IMO if Perth is not rising in 2018 it will be very difficult to make money due to buying and selling costs. What I have found is higher end stuff generates larger profits but higher risk

 

True. I have paid a fair bit for bad advice in Perth. My point is that I don't would not want to skimp on getting good advice because of the cost. For something this big it is worthwhile paying what I need to get the good advice.

The flipping business in not my idea I know all about the costs and risks. I have been running numbers for him and every property is a loss so far. He would not start until the numbers work, be that 2018, 2019 or 20 million! I'm sure you know what I mean. Personally, I don't see the appeal but he keeps raising it so I thought I would have a good think about it in case.

There is a small window coming up where it might be possible to make some money flipping but it will be short. Then he will be on to developing, which is where I would get interested.