Structures for Investors
Presented by: Kerrie-Anne Bailey
KAS Tax & Business Solutions
Phone: (07) 5585 2100
Email: kerrieanne@kasolutions.com.au
April 2011
Agenda
1. Getting the most from your investment property
2. Capital Gains Tax
3. Tax considerations for property development
4. Structuring with another party
5. Case Study
1. Getting the Most from
your Investment Property
Taxable Income
TAXABLE INCOME =
ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS
•
Increase your deductions and the taxable
income decreases
•
Consider the list of deductions page 11
Deductions - Depreciation
•
Depreciation
•
Low cost assets – immediate write off
•
Balancing adjustments on sale
•
Capital Works
•
Engage a quantity surveyor they save money!
Repairs and Maintenance
You Can Claim:
•

Repairs and maintenance directly related to the wear
and tear of the property from renting it out
You Can’t Claim

•
Replacements – replace a fence of kitchen
•
Improvements – landscaping, renovations
•
Initial Repairs – repairs existing at purchase
Interest and Borrowing
Expenses
•
Deductible so long as it is incurred to gain or
product income
•
Need to consider the purpose of the borrowing
•
Careful if you mix investment borrowings with
private borrowing
•
Borrowing expenses – lesser of 5 years or loan
term
2. Capital Gains on the Sale
of your Investment
Property
Capital Gains
Capital Proceeds
LESS:
Costs
EQUALS Gross Gains
APPLY:
Losses – Current or Carry Forward
LESS:
Discounts available
EQUALS: Net Gain – to be included in
Assessable Income
Taxable Income
TAXABLE INCOME =
ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS
•
Net capital gains goes into assessable
income
•
Decreasing capital gains reduces taxable
income
Capital Gains Rules
•
Date of acquisition for capital gains is the
date the contract was signed
•
Capital Proceeds are the amount you
receive for sale
•
Cost base – includes a number of facts –
refer page 12
•
Record Keeping Reduces Capital Gains –
refer page 17 for checklist
Capital Gains Case Study
•
Read page 12 of notes
•
Have a go at the answer!
Capital Gains - Example
•
Bought property in May 2008 $200,000
including $10,000 of plant
•
Stamp Duty: $25,000
•
Jan 2010 spent $30,000 on improvements
and claimed $125 in capital works
•
Sold for $500,000 including $2,000 of plant
•
Sale Costs: $12,000
Capital Gains - Answer
Capital Proceeds:
LESS:
$498,000
Cost
- Purchase
$190,000
- Purchase costs
- Improvements
- Sale Costs
$ 25,000
$ 29,875
$ 12,000
$256,875
Gross Gain
$241,125
Less 50% discount $120,563 net gain $120,563
3. Tax considerations for
property developments
- Income Tax
- GST
Taxation of Property
Developments
•
Capital Gains i.e. Develop and Hold
•
Income i.e. Develop and sell
•
Trading stock i.e. Running a ‘property
development’ business
Tax treatment –
One-off transactions
• Capital
–
Profit taxed as a ‘capital gain’ under CGT provision
–
If owned > 12 months ….. 50% CGT discount may apply
–
Taxed in the year the contract is signed
• Income
– Profit tax as ‘income’ (i.e. sale proceeds less costs)
– Taxed in the year the property is settled
– GST Issues
GST on Property
Development
• Do you need to be registered for GST
• Type of Transaction
• Is there GST on the Transaction
• What is the amount of GST
GST on Property
• Do you need to be registered for GST?
– Need to be carrying on an enterprise; AND
– The turnover must be greater than $75,000.
GST on Property
Old
residential
New
residential
Commercial
property
Does GST apply?
Input taxed
Taxable
supply
Taxable
supply
Amount of GST?
No GST
10% *
10% *
(unless
margin
scheme
applies)
(unless
margin
scheme
applies)
Note: * GST of 10% applies to sale consideration (unless margin scheme applies)
What is New Residential?
• New Residential
– Not previously sold as residential
– Created through substantial renovation
– Built to replace demolished premises
– Note: Exemption if rented for 5 years
• Substantial Renovations
– Renovations must affect building as a whole
– Must replace substantially all of the building
Margin Scheme
• GST only payable on margin
Margin = Sale Price – Purchase Price *
* Purchase price excludes development costs
• Note: You can not use the margin scheme
if you claimed the full GST on the purchase
Margin Scheme
• Apply the margin scheme when:
– Purchaser is not registered for GST
(i.e. cannot claim back any GST paid)

– Benefit: margin reduces the sales price
• Do not apply the margin scheme when:
– If property purchase had GST

Case Study
Facts
• Homer is a builder and registered for GST
• Purchases land with no GST for $150,000
• He paid $1,100 in legals and $7,000 stamp duty
• He builds a house for $110,000 and sells it for $325,000
If he applied the margin scheme:
• Margin will be $175,000 (i.e. $325,000 less $150,000).
• GST will be $15,909(i.e. 1/11th of the margin)
• Claim input tax credits of $100 (legals) and $10,000 (building)
4. Structuring with another
person
Purchasing Entity
• Tax effectiveness
• Risk Factor / Asset protection
• Compliance costs
• Other issues
– do you understand the structure?
– will the bank lend against it?
Different structures
• Sole Trader
• Partnership / Joint Venture / PSA
• Company
• Trust
• Super Fund
• Refer p 40 for a summary of the entities
Joint Venture v Partnership
•
What is a joint venture for tax?
– Not a separate tax entity
– Sharing output
– Refer p34 example – calling it a joint
venture is not sufficient
•
What is a partnership for tax?
– In receipt of income jointly
Accounting and Tax
Treatment
• Joint Venture - Each Joint venture
participant is treated separately for tax and
accounting
• Partnership- Separate entity for tax need
to lodged accounts and tax return for the
partnership.
Joint Ventures and GST
• Two options:
• Deal with GST individually
• Become an approved GST joint venture entity
Checklist
• Refer to page 42 for a
comprehensive checklist prior to
forming your joint venture.
• Joining with another person can be
very effective but can also be
problematic if you do not clearly
outline the terms up front!
Profit share Agreement
• This is a legal agreement between the parties
• Usually a land owner engages a developer / builder to
assist with the development of the land and the builder
obtains a fee dependent upon the final profit
• Each party retains their own tax profile
• The developer does not have a disposal power over the
land so the property is not treaded as trading stock for the
developer
Case Study – Page 39
Facts
•
Mr Reno owns a block of land and Meets Mrs Build a developer and builder
•
They enter into a JV and construct 10 units.
•
Mr Reno contributes land and 10% of costs
•
Mrs Build contributes her skills and 90% of costs
•
At the end each party obtains 5 units
•
Mrs Build obtains a 50% interest in the land as tenant in common prior to
commencing
•
Both parties agree to be a joint venture
•
Mrs Build is nominated to be the GST joint venture operator.
Discuss?
•
GST / Tax / Stamp Duty
5. Record Keeping
6. Record Keeping
• Keeping Records Saves Tax!!!
– Purchase / Sale documents
– Rental expenses – refer checklist in paper
– Interest / Loan details – get it right!
– Improvements and purchases
– Capital Gains Tax receipts.
Questions?
Presented by: Kerrie-Anne Bailey
KAS Tax & Business Solutions
Phone: (07) 5585 2100
Email: kerrieanne@kasolutions.com.au