I want to buy properties, subdivide them and then flip them for a profit. I want to do this continuously. Is setting up a private company the way to go?
I have an accountant but want a second opinion. Say I purchase a property. In the P & L, is the purchases of property classified as purchases?. Then it’s less Closing stock. Is this the market value of the property at 30 June each year? Do I get that figure from a real estate agent or a quantity surveyor?
Then all other expenses ie subdividing fees, legal fees etc are normal expenses to claim?
This is certainly a business operation so you won’t qualify for the 50% CGT discount. Companies are not normally the place to hold property because companies don’t qualify for the 50% CGT discount. In your circumstances there is no harm in using a company and it may work well for you being able to retain the profits at a tax rate of 28.5% to help with the next project. Note taking these profits out of the company for your own use will mean you have to top up the tax to your own tax rate or pay quite high interest to the company.
My only concern about using a company is that you may change your mind and end up holding the property as a long term investment and then wish you had held it outside the company so that you could halve the capital gains tax when you sell it. So be very sure before you buy in a company.
SMSFs are allowed to enter into property developments but they are not allowed to borrow to undertake the developments. If you do not have to borrow to develop these properties and you are happy for the profits to be put aside for your retirement, in return for some great tax concessions then a SMSF is certainly worth looking into in more detail.
Property development sites are a dangerous place so it may not be a good idea to own the property in personal names for asset protection purposes. If you think you may end up holding the property long term but can’t or don’t want to use a SMSF give some thought to a discretionary trust.
I don’t know enough about all your circumstances to give you a clear decision here but hopefully this is enough to give you a good idea of the issues and possibly eliminate your choices down to one. But make sure you go over this with your Accountant.
These properties are trading stock to your business this means that at the end of each year you do a stock take and enter them in the balance sheet as stock on hand and in the profit and loss statement as closing stock. You have a choice each year, this amount can either be cost or market value. The entry at the end of the year would be
Cr closing stock in P&L
Dr stock on hand in B/s
The P&L already has the purchase and ongoing direct property costs in it as a dr so you can see the closing stock entry, if made at cost, will cancel out the purchases and leave you with just the remaining business costs and income to pay tax on or carry forward as a loss. Interest associated with the original purchase of the land and the development of it can be written off each year rather than included in the stock figure. Land tax, rates, insurance, administration costs, market costs, selling costs and the like can also be expensed each year but the costs that improve the asset such as subdividing fees, legal costs to buy or subdivide must be held over as stock on hand/closing stock until it is sold.
If you choose to use market value it may, while the project is in progress, be difficult and costly to value and is only going to give you a profit, one would think. Using actual cost should be easier simply through the records you need to keep anyway.
References IT 2350, IT 2402 & TD 92/132