Structures for Investors

Presented by: Kerrie-Anne BaileyKAS Tax & Business Solutions

Phone: (07) 5585 2100Email: 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 MaintenanceYou 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: $498,000

LESS: Cost

- Purchase $190,000

- Purchase costs $ 25,000

- Improvements $ 29,875

- Sale Costs $ 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

• 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

Tax treatment – One-off transactions

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% *

(unless margin scheme applies)

10% *

(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

• Tax effectiveness

• Risk Factor / Asset protection

• Compliance costs

• Other issues – do you understand the structure?

– will the bank lend against it?

Purchasing Entity

• Sole Trader

• Partnership / Joint Venture / PSA

• Company

• Trust

• Super Fund

• Refer p 40 for a summary of the entities

Different structures

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

• 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.

Accounting and Tax Treatment

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!

• 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

Profit share Agreement

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 BaileyKAS Tax & Business Solutions

Phone: (07) 5585 2100Email: kerrieanne@kasolutions.com.au