Tax on property development - Sell some keep some situation

Hi All,

As part of our investment plan we are looking to start developing property in the next few years. As part of that I'm trying to get my head around the tax implications of developing property and the best structure to do this.

Our first development will be fairly small, most likely a block of 4 townhouses. My question is based around how profits are taxed on propertys in a multi unit development. Is tax paid on the margin per unit or is it calculated overall? An example set of numbers below.

Land - 530k
Construction/Dev Costs - 1250k
Holding Costs - 70k

Total Costs - 1850k
Sale Price - 2300k (575k x 4)
Profit - 450k
Mortgage at completion - 1350k

If we were to sell 2 units at 575k we would not cover the outstanding mortgage and therefore not turn a profit, although I can't imagine it being this simple. I would expect costs would need to be attributed to each unit and then the margin on each unit is taxed, although I have heard a few people mention selling a couple of units to reduce tax paid.

If tax is paid per unit then the best structure would be to develop under a company name to get the lower company tax rate. If not then it doesn't seem as important for tax reasons?

Cheers

Coxy

 

Tax is based on the profit, the loan oustanding won't really come into it. If you build 4 and sell 2 there would be profit (or loss) on the 2 sold.

structure is complicated - not as simple as saying a 'company' but there would probably be a company involved somewhere. There would be structuring of the structure to consider at well - should owner of the land be a company or a company as trustee, who should be shareholders, directors, structure and terms of any discretionary trusts and structure and terms of injections of funds - loans from related parties probably as well as banks. Who should be the lender and who the borrower, terms of the loan, security for the loan etc.

 

Thanks Terry for clarifying.

I simplified structure as from what I've read around the place advice on structure needs to be very specific and generally doesn't lend itself to being provided through a forum.

 

As Terryw mentions how you fund the project is irrelevant to the tax payable.
Assuming you sell some you will be liable for income tax at the relevant rate as well as GST on the units sold.
On the ones you hold you may be liable for income tax & GST when you sell them, or CGT when you sell them. It depends on circumstance and timing.

In your example, and assuming each unit has the same cost/value, tax would look something like
Total cost $1850 ($462/unit) (inc GST)
Sale price $2300 ($575/unit) (inc GST)
GST paid $120k ($30k/unit) (assumes no GST on land)
GST recieved $210k (4units) ($105 for 2units)

Profit $360k ($90k/unit). So $180k taxable income the year you sell 2x units.
If you apply the margin scheme this will change.

Tax on $180k @30% $54,000
Net GST paid $22,000.

There are many many many variables to the above. This is very rough.
People usually talk about selling one or two "to reduce tax" rather than selling all units. By the time you pay the REA for marketing and selling, plus the tax man the profits dwindle very quickly.

Get tax advice. Im not an accountant so have no qualifications against my name. Dont listen to a thing I say. Im probably wrong.

Blacky

 

Yes it does.

Also it is very difficult (expensive) to change the structure/ownership after you have purchased a property. Esspecially for development.

 

There are many many options for this unfortunately or fortunately. But the bottom line is, is that money owed doesn't relate to tax. If you keep 2 and sell 2 then one half (or the accurate percentage) of costs is attributed to the 2 you sell. The profit is what is left over after all the costs attributed to those 2 dwellings and that is what is taxed.

Structure is worthwhile delving into if you are considering holding and selling as they are 2 different strategies. I'm not a structologist but if you are holding 50% then you may want 50% to be owned by a structure that has access to CGT and use another structure for the 50% that is just selling.

That might be over kill but you never know until you know the answer.

 

Best to consult tax and structure adviser who has extensive knowledge in property development!

Trust or not, Company or not, will be based on your personal circumstances, family etc.

@Terry_w and @Paul@PFI can help to set up correct structure (Tax minimization,income distribution, asset protection,etc)

 

Thanks for the replies guys very helpful. Ill be talking to someome re tax/structure shortly before we start looking properly for the site.

Cheers

Coxy

 

This is good because you are going to need a lot of help to figure out the best approach. It's complicated! I know this because I once wanted to buy a house with another person to retain and build behind with me owning the front and him owning the back. That's a nightmare in itself.

Something to keep in mind is that you might want to purchase the property in one entity and then sell using that (or another entity) and hold using a different entity. For example, you might buy in a trust and sell using a company or buy using a company and sell using a trust. I don't which is best but transferring properties between entities ususally incurs stamp duty and GST (for new dwellings).

One option to consider, and I don't know if it will work in your situation, is setting up a partition agreement prior to the purchase of land. This is something you will need to discuss with your professionals if you think it might work for you. Here is a link to some useful info to give you some ideas of the possiblities.

http://www.13wentworthselbornechamb...ploads/2015/01/partitioninglandaugust2010.pdf