I am a “mum & dad” type developer and have just purchased another block of land to construct next property (duplex). I have built and sold a couple of properties previously and thus captured as ‘conducting a business’, with sole trader gst registration, BAS, margin schemes etc.
My spouse is looking to invest in property as part of her long term financial plan so we are considering the possibility of selling the property I develop to my spouse. Our thought process is that I am going to selling the property anyway (as my business) and she would be able to purchase an investment property without real estate commissions thus making it a better financial prospect for her investment.
We are not trying to achieve a tax advantage as I would be still be paying gst/tax on this sale as part of my business irrespective of who purchases the property. Also, my spouse would still be liable for stamp duty (NSW property) with this transaction.
• Are you aware of any issues the ATO would have with this scenario of selling to my spouse? Is there anything we should consider when structuring this transaction?
• Would my spouse still be entitled to the normal depreciation and deductible expenses associated with this investment property?
* Are there any other factors to be considered?
Not a problem as long as everything is calculated on the market value. But…
It sounds to me that you will do this again soon and I guess your spouse does not want to buy all your developments so that will be sold to third parties. Rather than your spouse acquiring this investment why not have her buy the land, right from the start, for the next investment and keep that one. You can project manage and there is no rule that says you have to charge her as long as you don’t try and claim the associated deductions. Though there is a rule for GST that you still have to remit the GST portion of what you would have earned, though no one seems to pay any attention to that. As she is keeping the development as a rental she will not be able to claim back any GST but as long as she keeps it as a rental for 5 years she won’t have to charge GST either when she sells it. Further stamp duty would be less because it is only the land value and none of the costs of double transactions. Taking this one step further you might want to talk to your accountant about whether it is appropriate for her to buy the property in a SMSF. There is a problem here in that she cannot borrow for the project so the first question is whether you have enough in super. Second question is whether her employer would make super contributions direct into her SMSF and lots more questions if you take this path so make sure you go over this with your accountant if you have enough in super for it to be a possibility.
If she does buy this current property from you then she won’t be able to use a SMSF anyway. The only other relevant structure would be a discretionary trust but this won’t work if the property is negatively geared, it is better in her personal name but asset protection maybe an issue. That is something to discuss with your accountant who knows your whole circumstances.
If the property is a keeper (rather than my suggestion of your spouse buying the next property) why don’t you just keep it in your name to save GST and stamp duty? After that though I would suggest you continue your property development in another entity for asset protection purposes, even without it consider another entity as a sole trader developer is too much risk exposure for my liking.
Your spouse would be entitled to the normal depreciation and deductible expenses. Make sure she clearly borrows to buy the property from you, not takes over your loan. She will only be entitled to depreciate the cost of the building to you not your profit margin. This is not because she is your spouse but simply because building depreciation is base on to cost of the property to the first owner, which is you. If she bought from another builder that builders profit would not be included in the depreciation amount either.