Trust vs Company vs Personal for potential development

I was talking to my accountant about purchasing a property which may have potential development potential.
What I was told is that if I was to build 3 or more dwellings and regardless of whether the property was my PPOR or not the CGT upon selling the developments would be much higher under my own name than if was held in a company or trust.
In a company the tax rate is 26.5%
In a trust the tax rate is when distributing to a beneficiary company is 30% and if it was distributing to an individual beneficiary it would be assumed to be a lower income individual in the family

The down side of setting up these structures upfront on something that may or may not happen is there is set up and ongoing costs for maintenance and reporting (accounting)

I was wondering in a situation where you buy something with development potential in the future, would you also set up a structure such that you could do the development tax effectively upfront?
Apparently the exception would be if I was to only do 2 dwellings like dual occ on a property I lived in and held under my own name, it would be possible to sell one off CGT free (as it is PPOR) and keep the other one and the second one if lived into can also be sold CGT free for that period also. However if it is 3 or more, that is no longer the case.

Alternatively would be to set it up later and transfer into the structure as required later and therefore incur stamp duty charges

 

It highly improbable CGT will even be a factor. Even living there (if it were personally owned) would not access the main residence concessions as its not a CGT asset. TD 92/135 indicates this view.

The accountant does not sound like they are truly property developer experienced and it may assist to consider all the issues in our developer toolkit which explores all that incl GST. Then it would be wise to seek comprehensive tax planning advice for what you propose. You seem uncertain as to the size, scale and use for the property.

Using a trust,+ bucket company strategy also has a fatal limitation. If you seek to pull out or use any of the profits personally then the marginal tax rate may well be far MORE than 58%.

The accounting issues for all entities and activities are no different at all. Whether sole trader, personal, trust or company.

You also havent considered land tax as a development cost.

The idea to later transfer will trigger GST, income tax and duty and be a substantial erosion of profit. Prior planning is the correct thing to avoid taht

 

what does your lawyer say?

 

Got some further clarifications from my accountant regarding this.
Apparently there is no clear cut ATO stance on a situation where I buy my own PPOR and then later decide to develop and sell 1 of the developments as a PPOR (CGT free). There are several factors that may sway the interpretation as to whether the development is considered a business activity or for the purpose of developing a residence.
What he told me was this and happy to be corrected otherwise:
1. If you buy something in your personal name the ATO is more likely to view it as truly a PPOR vs buying it under a trust which may indicate there were intentions to minimise tax from the profits
2. If its your first and only property the ATO is more likely to accept it as a PPOR
3. If its your first development the ATO is more likely to accept it as a PPOR. If you are doing multiple developments back to back there is no way the ATO will believe you are doing it as a business activity.

Therefore the conclusion was made that it is best to put the first property under my personal name if there is an intention to develop in the future because it is likely that the first property can be treated as a PPOR and 1 subsequent developed dwelling be sold CGT free as a result. However longer term a trust or company structure is the only way to go if and when further developments are undertaken.

 

sounds like purchasing as tenants in common with a bare trust arrangement and deed of partition wasnt discussed. what a shame.

 

Hi Mike,

Do you mind clarifying how that arrangement works? How CGT/profits are treated? Certainly haven't heard of this before.

 

Why would the subsequent developed dwelling be CGT free? I cannot see a scenario where that would work in the way you described. Except in the instance where it is CGT free because it's not a CGT event but is income tax (and potentially GST)

 

To qualify, I would live there for 6-12 months after completion of build

 

It could slip under the radar, less likely if you sell both

 

Most likely I will sell one, it will be purchased as a PPOR initially. Even if I sell the 2nd, it won't be CGT free as I won't be living in both at any one time.

 

GST also applies to sale of new residential premises.
TD 92/135 may apply in the scenario.