Ask Ban Tacs Question
I am purcahsing investment property in Vic with view to build 2 units on site , retain original house.220,000
I already own one investment property in Vic with no debt but loan offset account also have 60,000 cash. Am holding this as principal place of residence though I currently work and live in QLD and will be here for 12 months more. I reoccupy old house every 6 years. Existing house I own site value 102,000. cap imp val 182,000.
New property site 99,000. cap imp val 187,000. I want to build units in next 18months with view to sell units retain house. Should I purchase under company name or in my own name for best tax outcome.
Thank-you
Answer
The first consideration is whether you should use a SMSF. The problem with SMSF is you can’t borrow for construction SMSFR 2011/D1. So you will need to have enough money in super to construct the units without borrowing or use a non geared trust. Note even using a non geared trust means that you can’t use this new property as security for a loan but at least you can borrow using other assets you have outside of super. Another consideration is whether you want the profits to be locked away in super and that you could not live in the property. I am going to assume that these obstacles make the use of a SMSF too difficult for you but if you think you can work within these restrictions it is definitely worth looking into because the tax benefits are huge.
You say you are going to retain the house so a company is not a good idea because companies do not qualify for the 50% CGT discount.
This leaves you with two remaining options, a discretionary trust or hold in your own name. A discretionary trust provides you with good asset protection, something that should be given serious consideration because building sites are dangerous places. A discretionary trust will allow you each year to decide who gets the profit and allows you to pass the 50% CGT discount through to non company beneficiaries. A discretionary trust can also have a company as a beneficiary for the times it may be useful to shelter profits at the lower company tax rate. But note if the trust continues to use these funds they should be formally loaned back in an agreement that specifies the ATO Div 7A interest rate as a minimum.
The down side of a discretionary trust is you will not be able to cover the retained house with your main residence exemption should you ever live there and it can’t distribute losses. Not being able to distribute losses means that you either have to have another trust with profits that you can distribute into this trust or that the trust does not make losses. No doubt in the first year while you are going through the planning process it will make a loss. If you can afford to forgo claiming this loss against your wages income you can save it in the trust to offset against the profit on the development in the future. The remaining profit you can distribute how you choose, it can’t be left in the trust as it will attract the maximum tax rate. The trick then is to lend back to the trust enough to reduce the loan on the retained house to the extent that it is positively geared anyway. To achieve this the loan would have to be interest free so it would have to come from profits distributed to individuals, not the company.
So based on my limited knowledge of your situation and the assumptions I have made I tend to favour the use of a discretionary trust but please take the time before you buy to sit down with an accountant and discuss your individual circumstances in detail such as cash flow and the tax brackets of family members you may distribute to. I think you would benefit greatly from reading my How Not To Be A Developer booklet. http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf Not that you can avoid being a developer in regard to the units but it still explains the problems associated with development.
