ownership structure for individual for development project

Hi All,

I am wondering what is optimum structure for doing development project when development is owned by individual person and not via trust or company.

Reason i am asking this question is because i have read on this forum before that use of project management company is tax effective. I am not able to understand that part. Can someone give me example based on below numbers? I have given below example without use of project management company.


Site purchase : 500K
Site settlement date : 01/07/2014
Ownership structure : individual ownership, assume that individual is earning 100K per annum from regular job
construction :450K
interest from settlement till sale of all units in development : 50K
(for simplicity assume that only 2 units and they were sold on same day)
Total resale value : 1200K
Sale date : 30/06/2015
Gross profit : 1200K - (500K + 450K + 50K) = 200K

For financial year 2014-2015, individual will claim following in his/her tax return.

100K income from PAYG job
200K income from development
======
Total taxable income 300K

 

Don't forget GST

 

The idea is to divert some income to another entity.
So a project manager could be a trust and it could charge you the owner a fee to manage the project. Care must be taken that the fees are not too high or the ATO may disallow deductions. You will need to carefully discuss the fee with your tax agent to make sure it is a commercial amount. perhaps 10% of the construction costs.

Also consider related party loans.

 

Thanks Terry.

 

@Rooky

Don't forget GST.

Also, may /may not be eligible for CGT.

 

Need to be careful if setting up a management structure if you own the property and it's your development. Ato could deem the "management fees" as profit shifting and or a scheme/tax avoidance. I am being extreme here though..

 

If the property is currently your PPR and you have a spouse you could transfer say half to her with no stamp duty or tax implications, then develop and sell. So to take advantage of the tax brackets via your spouse.
This assumes:
1. You have a spouse haha and
2. He income is substantially less than yours.

You should speak to your accountant about strategies to reduce your taxable income - salary sacrifice etc

But this thread does highlight the importance of setting up correct structures and getting good advice before purchasing.

I know what I have said above my only make minor differences to the tax outcome on a 200k profit, but hey..

Only other thing I can think of is as they will most likely be on "income" account for accounting purposes try to arrange for settlements of the "2" units to occur in different financial years - thus splitting the $200k into $100k one year and $100k the one after - hopefully keep you under the 180k tax bracket..



Best of luck

 

If neither the development nor the management co are your own name, ie separate entities with arms lengths agreements at market rates it should be fine right?

 

Yes it's fine.
I was more taking about setting up a management structure for a 1 off Dev when prop owned in your own name..

 

I am in a similar position, with land owned in my name . Wanting to do a Townhouse development. Have owned the land for about 15 years and rented the house on the land all this time. Any help with the best structure to use ??

 

Seek legal advice. Its not as simple as a one word answer.

There are probably 5 to 10 different ways to do this.

 

Will be seeking legal advice, but just trying to understand the advantages of the different ways of doing it. Any examples would be appreciated.

 

There are heaps of examples on here. Search my legal tips for starters.

 

The first issue is that the ownership of the land means that the sale must be made by the legal owner and changing this now may come with duty and other costs. That would also be a CGT trigger perhaps.

Its a reason why prior to commencing a dev that personal legal and tax advice is essential. Bear in mind structure may affect finance and so financing considerations also impact the structure.

The developer toolkit also helps to explain many of the tax issues that also must be considered. This may depend on other factors like - what do you plan to do with the t/h after build. I often encounter people who say - keep them. In which case really you are not a developer. Just building income producing property. But it still comes with tax issues to consider and understand. eg GST, CGT or isolated profit making ? etc