Hi all
My husband and I tend to be a bit quiet on the forums but attend all the BTBFF catch up days in Melbourne :)
Our strategy is development but we are new developers, and we are gratefully seeking some general advice from people who have developed before (any good tips, things to watch out for etc! :) ) as well as info about tax structures.
Currently we own 3 IP's that we have purchased with the specific strategy of knocking over and developing. They are all older houses on big blocks.
We are at present in the process of beginning our first development of the 3 sites, and have just had our DA approved to demolish the existing house and build four 3x2's on the site. The plans are currently out to tender with 3 builders.
Once this development is complete we plan to build 8 units on one of the other sites we own. The last site we are still thinking about but likely we will look at townhouses.
We have a good accountant (read: expensive, haha), who has set up a Trust for us with a company as trustee, under which we purchased the last IP. The other two IP's were purchased under our own names before we had the Trust, so our accountant has also set up a partnership for us with a separate ABN to the Trust so we can claim GST on an accruals basis and to help us with tax.
We are wondering if anyone else has this type of tax structure and what you think of it - do you agree it's the best way to go for us? We considered selling the other 2 IP's to the Trust, but of course the stamp duty costs would be high. Still we are wondering whether the tax benefits from the partnership will be worth it or if in the long run it would be better for all properties to be under the Trust regardless of the cost of selling them into it?
Thanks so much!!!
Hi Carolyn,
Congratulations on taking such a significant leap. I too am also undertaking my first townhouse development and it certainly I massive learning curve from a simple buy and hold investment or even a renovation.
The way I was structured for the development was like this. I had a corporate trust set up to purchase the land/property. I also had a seperate company set up to act as the Project Management company to undertake all the work. The PM Compnay is contracted to the land owner to carry out all the work necessary to complete the construction. All the transactions, GST credits and Debits, PM fee, sub contracting etc is all carried out through the PM company. The trust approves the funding/loans etc.
The reason I did it this way was to shift a lot of the end profit out of the trust and into the company. The company pays a fixed tax rate of 30% and can be retained inside the company for growth etc. If all the profit (when you sell everything) is within the trust structure, then it must be distributed at the end of the FY. As I did not want large distibutions flowing through to the beneficeries (ie me), becuase I would be paying more than 30% tax, it made more sense to have the profit flow to my PM company as a project management fee.
I hope this makes sense to you.
In terms of a partnership, sorry I can't help you there.
I would recommend that you at least consider holding some of the investment stock in your own portfolio. Let's say on the 4 townhouse construction, keep the one of the town houses in your holdings and not sell it off. In a perfect world the profit from the other three will pay for the construction of the 4th and you will own a debt free brand new house. The rent received is now passive income of $15,000 - $30,000 per year depending on what the rent level is.
When you do next build, look to keep two of these town houses. In a short space of time, you would have three unencumbered town houses through off about $75,000 per year in passive income while your sleeping, not a bad place to be.
Curious to know if you control these properties under an option arrangement or did you buy them outright?
Love to hear about what you are doing and the learning outcomes you are identifying so we can learn from these and not make the same mistakes. I just learnt a very valuable lesson this week which I will share on my Development post.
Take Care and good luck,
Dean
Hi Dean
Thank you so much for your very valuable feedback and advice. Sorry I haven't gotten back to you earlier.
I'm very interested in your set up and we are wondering now if we have the correct set up. Our 3rd property was bought under our company as trustee for our trust, so I don't know if we could set that up as you have done so ingeniously with your PM company as the company is essentially the owner of the property already. I guess if we'd purchased the property under our trust only, we could perhaps use the company as you have but unfortunately it doesnt seem we'll be able to do that now unless we set up another company? It's quite confusing and I am probably getting it wrong, sorry. We have gone on the advice of our accountant and are still wrapping our heads around how it all works. Our company is just a shell company at present, there as trustee for our trust and no more. We're on an accruals basis for GST but have been wondering how to move to revenue based.
We did buy these 3 properties outright - well, with mortgages, and they are all rented at present to assist with our holding costs. The first two were bought in our own names, now our partnership.
Love your advice on holding one of the dwellings. We were considering this actually but weren't sure what the implications might be for tax/bank etc if we develop but then don't sell all of them. We are also trying to find out what we need to do insofar as setting up some kind of body corporate - although I don't think that's what it would be, exactly - the dwellings will all be on their own title but there is some common area eg: driveway, landscaping and lighting bollards and we're not sure how to organise something whereby someone is responsible (financially) for their upkeep?
Are you doing a built strata or survey strata? Which state are you in?
Sorry to bombard you with questions! I hope you come to the BTBFF meetings as it would be great to catch up tomorrow.
All the very best,
Carolyn
Hi Carolyn,
Aplogies I have been offline with Uni for a few weeks.
Yes - I have two separate companies - Coporate trustee (which is what you have) and then I have a stand alone Company with its ACN etc. This Project Management Company is registered for GST, PAYG, Super etc you name - it is a live trading company. I have since started a styling business under this company, so again it is all related. The corporate trustee (like yours) is purely a company shell that acts as trustee for the Trust that holds the property.
It costs about $450 to set up a companyand then annual accounting fees etc.
As I said, the benefit for me is to move profit 9in the form of Project Management Fees, from the trust to my company. Let me explain. If my development produces an after expenses Nett profit of $100,000 (without any project management fees as I do it al myself) - then this $100k needs to be passed onto the trust beneficeries - that should be simple and straight forward to understand. But I dont really want or need to have an additional $100k flow through to me or the other beneficeries, so I need a way to have the profit consider as another expense - Project Management Fees!
So I set up the Project Management Company and I now charge a project management fee for everything I do - Submit plans to council - PM Fees - go on site to check on work - PM fees, monthly PM fees for anything. Now bare in mind you must be reasonable in what are PM fees - I simply charge 12-15% on every invoice or activity I do. When I get to the construction stage of the development my PM company will charge the Trust 20% management fees.
My development has about a 40% ROI, so 20% of it will flow through as PM fees to the company and now only 20% will be left as Net Profit. I hope this helps clear up your questions.
There are no issues with the bank, ATO or your accountant retaining stock. In fact you will generally find you will be better off as you are retaining the stock in the trust - and it did not need to pay GST or Stamp Duty for it - BONUS!. In an ideal situation, the sale of the other three units will generate sufficient income to pay all expenses (construction costs, GST, etc) and you are left with a debt free property in the trust.
I would recommend against buying this from your trust into your own name as you will need to pay Stamps and GST and it just isn't worth it. You can now use the equity that the trust has to fund the next purchase into the trust.
Yes I plan to strata title the units and guess what - I will retain the property management rights and the Body Corporate rights within another arm of the Project Management Company. This is what I call the Value Chain. I sell the units to investors and then offer property management on the sold unit. I will also own the body corporate rights to look after the BC areas etc. A little complicated to go into detail here, but maybe we can chat at the conference about it.
the development is in NSW and I am in Canberra. I dont attend the BTBFF unfortunately.
I hope this helps. I am more than happy to go through it more in August in Melbourne.
Dean
Hi Dean
Thank you so much for your great advice and information. Unfortunately we didn't go the conference this year as our money is tied up in everything else so this is the best contact for me. But what you've explained is fantastic and I really appreciate it, as we will take this to our accountant to discuss with him.
Good luck with your development, I look forward to reading more about how it's all going!
Thanks again and all the very best!
Carolyn