Flips

The legislation is pretty difficult to read, but see the example of Fred and Sally, "Profit making activity of property renovations" on this page: https://www.ato.gov.au/general/prop...uilding-and-renovating/renovating-properties/

 

If you do it once it's not a business. If your "intention" was to do it, different story. So you can buy a house with the intention to live in it, and live in it then change your mind and sell it. It's when you do it repeatedly that it becomes a problem.

 

Best I could locate:

http://webcache.googleusercontent.com/search?q=cache:VN4WyOrsW4YJ:https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Are-you-in-the-business-of-renovating-properties-/?page=2+&cd=1&hl=en&ct=clnk&gl=au

In regards to property renovation, are you in business or doing a profit-making activity?
Whether you are in the business of property renovating or undertaking a profit-making activity in regards to property renovation, is a question of fact. Some of the questions you need to ask, in regards to your property renovating activities, to help you in this decision are:

• Are they regular and repetitive?
• What is their size and scale?
• Are they planned, organised and carried on in a business-like manner?
• Are they carried on for the purpose of making a profit?
• Do you rely on the income received to meet your and your dependants’ regular expenses?
• Are they of a similar kind and carried on in a similar manner, to the activities of other property renovating businesses?

In reaching a conclusion, no single factor is necessarily decisive and many may be interrelated with other factors. The importance given to each factor varies depending on individual circumstances.

However, you are likely to be entering into a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and go about it in a business-like way.

Example

Renovation as a profit-making activity

Fred and Sally are married with two children. They renovated their home, substantially increasing its value. After watching many of the home improvement shows and seeing how other people have bought, renovated and sold properties for a significant profit, they decide to investigate the purchase of another property to renovate and make a profit.

They consider many properties, costing out the renovations, costs of buying and selling, and time frames to complete the renovations. Their research shows that they also could make a significant profit.

They sell their current home and purchase a new property which they move into while completing the renovations. They plan out the renovation in stages, including the costs and any contractors needed to complete the work. The renovation runs to schedule and when completed they list the property for sale. The property sells for a profit.

As the property renovation activities were planned, organised and carried on in a business-like manner; the purpose of buying the property was to renovate it and make a profit; and the renovations were carried on in a similar manner to other property renovation businesses, Fred and Sally have entered into a one-off profit-making activity.

 

Interesting
Not really sure how ATO could monitor this, I expect it would be very difficult to flag people who are renovating primary residence and repeating this for profit, ie not in company name, no CGT, not registered for GST

MTR

 

Like many other aspects of our tax system, it largely relies on honesty and harsh penalties if a taxpayer is discovered failing to be honest.

 

I think it would be hard to prove peoples intent. A house is a big purchase and to say that you purely bought a house for its income potential would be very difficult to prove.

If you are buying a PPOR every couple of years and selling it on after renovating it is a lot different from buying 3 PPORs a year and selling them on. I think that buying multiple PPORs would raise interest from the ATO, however as you have mentions it does rely heavily on honesty. My neighbour works for the ATO and has said that to me.

If you are dodging taxes and they investigate you they aren't just going to look at the taxes you are dodgying, they will look at you holistically and thats where you come un-done.

By the way I'm not into being dodgy!! I just don't like saying I'm honest as most people that do are usually far from it IMO

When I started the thread I was interested in the business of flipping, but from everything I read and all the numbers I have crunched over the years flipping is a mugs game unless as @MTR and @Travelbug said you expose yourself to the high-enders.

@MTR thanks for the inspiration I have been reading old posts all weekend

 

It would only be picked up in an audit. It's like the people who submit bogus business activity statements... they get away with it until they get caught. It would be clear from the tax returns that properties have been sold and the 'Main Residence' exemption claimed. From there, if an audit was triggered, it would likely be obvious from the records kept whether the renovation and sales had been planned, organised and carried on in a business-like manner. If it is a couple and both have jobs, this may make it less clear. But records would still likely show either way. I guess if the people knew what theyu were doing, they could make their records look like it was all incidental. But then they would have to ask themselves if it is worth it to save a few dollars.

 

I have been looking at this too. Myself and my investment partner have almost all of the skills to do good quality renos. It would only be worth it in a rising market. In Perth in 2013/14, in the right areas, I think you could do rather well. You can't leave it too late in the cycle though. I have seen some of the people who bought in 14 and tried to sell in 15 get burned. I saw one in Bedford? on the market for a lower price than the sale price in 14. It's tough to sell at a loss after all the work of a major reno.

 

Get in and get out as quick as you can!!

Maybe we should look at Sasha deBretton model she is making a mint from quick renos (of other peoples houses)
http://www.milliondollarmakeovers.net.au/

 

Million dollar makeovers eh? Is that the price of the reno?

Quick flips will depend on the market and your business model. I have renovated a place to get higher rent and then sold because and opportunity came along that was too good to refuse. As a one off, with no intention to renovate and sell at a profit, I didn't consider myself in the business of renovating for profit. That was quite a long flip but I did ok out of it.

If I was in the business of renovating for profit, in a rising market, quick flips would be the way to go.

 

Note that they have a builder's licence.

 

I think so, apparently you Perth people are prepared to pay extra for a quick reno!!

Yep with you on that

 

FWIW I am aware of two people who have been fined by the ATO and one was only on his third one in 5 years.

 

My investment partner wants to become a flipper when the Perth market is in recovery mode. I haven't looked at beneficial ownership structures, but what would happen if we did this: he buys 80% and I buy 20%. He does most of the work and I help out a bit on weekends. So, he would chase up the trades, get quotes, do physical labour etc. I would provide support. I would keep my job, spend a little bit of time on the property and earn most of my income from my primary employment. He would get most of his income from flipping. It is clear the ATO would consider him in the business of flipping. However, what about me? Would I be considered to be renovating in a business-like manner? Is is possible for the same house, on sale, to be treated one way by one investor and another way in another investor? I'm just throwing around ideas at the moment, so not after legal advice. Opinions and speculation welcome because I will be getting proper specialist advice prior to purchase

 

From the flipping success stories I've read the money is made in the buying process.. The actual reno is just a small component.

This one comes to mind..

I'd also be looking for inexpensive value add-ons such as changing the floor plan (partition walls, not structural) to open up or add rooms.

 

I can concur this. I know 3 people that do exact same thing. They buy old house / or vacant land in high end market. They build and live in it for a year then they sell. they profits are mind boggling. Out of those 3 people one is in Adelaide and two in sydney.

Over the last 8 years, two of them got audited and they passed audited without any problems. Their profits per year are anywhere from 50k - and up to 800k. All three still have day to day jobs.

One example is purchase in Sydney eastern suburbs for 2.1m for old house, plans were lodged for duplex, the build was 1.1m. One duplex sold for 2.23 a year after it got built. They then moved into the other duplex and spent another year in there. After that they sold it. Sold that one for 2.78.
Both got sold privately with no advertisement as they built in a good area. The first duplex was bought by his neighbor for their son. And the other was bought by overseas buyer who he found though a friend who is realestate agent who works with overseas buyers. (This duplex was sitting vacant for 1.5 years, I guess the overseas buyer decided not to come).

These figures are approximates but it can show how much money can be made. Although that same person before that project only made 100k doing the same thing (this was during downturn in the market, even he admitted that timing was not the best). Finding the right project that matches with your strategy is the most important part. On top of that you need a significant cash buffer for when things go wrong.

This strategy works really well if you have a lot of $$$ to start off with, but it is possible and no issues from taxman....

 

@Perthguy
Well if you are buying in your own names, I know that you will have to buy as tenants on common so you can aportion 80/20 split.
But this is where I'm thinking that buying in a trust and trading as a business is probably better in regards to CGT, as you can claim the GST and pay 30%business tax. This is something I will be looking into, I'm visiting my accountant in 2 months. So I will watch if anyone comes up with a good model.

Absolutely!!! I have been working on this method for the past 8 years

Yep dollar$ help. I'm not about to move from my PPOR. So it will be a business and I just have to establish the structure. But I think I am going to include development or subdivision in my business plan as pure flips I don't think will have enough ROI to make it worth it.

 

That's a solid plan. There are houses around that can be retained, renovated and subdivided. Some of the existing houses are really solid and have great potential but are being sold in very poor condition, which puts off a lot of buyers. If you can find one at the right price, renovate the front and subdivide at the same time, I reckon you are miles in front.

Ok, real world example. Before (purchased in Aug 2014):

http://www.realestate.com.au/property-house-wa-bayswater-117439067

after: http://www.realestate.com.au/property-house-wa-bayswater-120327213

and vacant block: http://www.realestate.com.au/property-residential+land-wa-bayswater-201244597

Personally, I wouldn't sell a vacant block in that area, but each to their own. Assuming they bought the original house for mid 7's, sell the front for $600k and the back for $350k, I think they will do ok.

 

One of the most common misconceptions is that the ATO have enshrined in tax law a single prescribed outcome for property transactions. Most tax law derives from common law...Case law etc. Tax law generally prescribes tax laws to some specific matters. A great example is what common law considers ordinary income.

Ordinary income occurs when the intention is to derive income and make a profit. On this basis it may seem that all people who acquire a property with an intention to flip may fall into this category. They can ignore capital gains tax and pay ordinary tax on every dollar. However this isn't true. The approach needs a system like approach so that its operated as a business. Some people buy and ownerbuild their own home and sell to profit.

Signs of problems:
- Diligent records of costs and receipts etc. I had a client audited and they had real concerns that owner builders tend to work to a budget etc but diligent records to identify the extent of profit pose a concern.
- Duplication of a model adopted by someone else in a business (your apparent issue)
- Not living in it (I mean a full time residence)
- Not having other employment income or a substantial source of means to address living costs
- Working with others who do similar (ie mates)
- Use of a revolving credit facility where your application is assessed on the basis of you explaining you would make a profit
- Trade skills and qualifications / licensing etc are a real killer. A builder cant argue he didn't seek to profit if that's his trade skills.
- Courses

 

Not quite.
1. If its a reno of a residential home you cannot claim GST on the reno costs as these are input taxed by GST law. No point registering for GST but likely an ABN is needed. The business basis doesn't change it.
2. The "CGT" reference threw me. First there isn't CGT as its just "profit" and secondly a company tax rate doesn't differentiate anyway.
3. Trusts aren't taxed at 30%. The beneficiaries are taxed at their marginal tax rates. Using a bucket company may fall foul of many laws and see a higher tax rate imposed where its a profit ripping scheme intended to achieve a company tax rate rather than that of the individuals. Using a company instead wont assist as extracting profit from the company generally results in more tax somewhere.
4. Don't forget to report contractor payments annually.