Property developer verses a Property investor.

Hi wilko1,

Thanks for your reply.  Ok, that makes a bit more sense to me – please excuse my ignorance about it all.  

I will meet with my accountant this week to discuss. If you are able to reply again – My scenario is this.

*Wife and I own our current PPOR outright. 

*GST registered business was setup.

*Land purchased with wife as tenants in common 99%, 1%.  Security is the land itself, deposit paid for in cash. LVR 80%

*Land attracted GST as it was originally a council reserve.

*GST was paid in cash and credits were claimed back in BAS (after ATO performed a small audit to confirm that we are running a business enterprise).

*I'm an employee of a large organization. Wife works as a casual.

*Our future plans are to get DA and to sub the land into 3 lots & to build 3 detached houses.  We'll also be claiming the GST credits during the building process.

*If all works out, we would sell to make a profit and return 1/11th of the profits to ATO.

*If selling after the build is not a profitable option, we may need to rent out all 3.  (rent 1 to my son and the other 2 to lease applicants).

*We were wondering what would happen if we were to sell our current PPOR and just stay with our son.   I am guessing that this happens all the time but I'm unsure about how it is perceived by ATO.  I don't want to make any big mistakes tax wise.  I think that renting to son and living with him gives me more options down the track when the market becomes suited for selling – I'd still be able to claim building depreciation and the income loss against my income tax (I think that's correct).  I am not sure about your answer to Q1.  If I make a loss, can I still claim a tax deduction for that?  

Overall, from what I think you are saying with your reply, I am not obligated to make this 3rd my PPOR (I have the choice because I am the owner and can do that if I want or not). I can choose to keep renting it out until it is ready to sell.  

Can I not rent out the 3rd dwelling to my son and still stay at the location (with my family) and not make it my PPOR either?  It is obviously not available as a rental if that is the case, does that mean that I would be subject to the same restrictions as a Property investor has if they do not make a property available for rent?

Sorry again.  My accountant may have to help me understand this, using simple pictures. hehe.

Cheers.

Thanks wilko1,

It's always great to read your updates.  I appreciate the time you have taken – you do make sense.  

I've setup another meeting with my accountant to hash out all my options so that I can see which one works best for our situation and risk profile.  

You are right, development is a business and it should be profitable whether the market is up or down.  I guess the onus is on the developer to have the skills to put it all together and add value either way.  I am just starting and wanted to forge some exit strategies in case things go a little haywire.  

Thanks again for helping out. Best of luck to you.

Thanks Terryw. 

I knew that writing that we were debt free (on our PPOR) would get us some unwanted attention!   We did it the "delayed gratification" style – No flat screen TV's. A bit boring but works a treat if you want to buy property sooner.

Fortunately, wife and I are pretty good savers and that means knowing how to hold onto our money.  Saving money for the sake of just saving didn't feel right to me as it felt easy and that's when I knew that something was wrong.  I don't think that investment should always be difficult but making money takes quite a bit of mind power and effort or all of us would be wealthy by now.    

These overseas (and some closer to home) offerings don't penetrate through to us easily.  Always happy for your advice though as it seems that your understand of asset protection supersedes ours by a factor of 10 or more.    Your tax law knowledge (especially in trusts) has been golden to read about.  We certainly think a lot about asset protection and we hope that most others are doing the same.  Some of that knowledge was very handy when we got the loan for our land.   I still haven't created a trust but it'll happen when the time becomes right for us – knowing how to keep money can sometimes mean that, the ones who are able to take it away from us, are the most cunning of all.  A bit like how the only germs people get from hospitals are the strongest, deadliness and the most resilient (all the weaker germs are easily killed by bleach).  Can a trust keep assets protected from germs too?  Kidding. 

Anyhow, sorry to digress – just felt like having fun typing.

Cheers.

We agree 100% Terryw,

We think that protecting what we have is paramount too.  

We have looked and discussed a few avenues that we could take.  

I have a fair understanding of unit, discretionary or hybrid trusts to control our assets but "fair" understanding doesn't cut it because it's far more complicated than I suppose or even more complicated that I can suppose.   Maybe I just haven't spoken to the right trust experts yet.  I'll investigate my options in more detail soon because we do trust your opinions.  

We have looked at best protection from banks etc by not cross contaminating our loans but we should look deeper at "arms length" ownership protection strategies as what we are planning to do regarding development will expose us to more risks that what we are used to as plain employees.    

I can tell that there is no one answer to asset protection as they all have their pro's and con's –  Do you think that you can come up with a strategy for us based on what you have read about my status above that incorporates a good balance of protection and retains the ability for us to cope with losses?  Pardon me if this is impossible to do without knowing more details about my situation and my goals, I just wanted to know whether you have something on your mind regarding what I should be doing in particular.  Maybe a simpler way to answer  is: Does anything sand out to you as a must do in my situation?

Cheers.

I should have entered this forum ages ago – wow – thanks to both of you, for the updates.

Just on trusts, I ruled out creating a unit trusts because I didn't feel that it was at arms length (I could be wrong) so I thought that it wouldn't help my situation to get where I wanted it to.  Then again, maybe I should create a separate entity to perform the development process – Company, trust – will have to investigate further on that.  

My plan is to get a smart mob to draw up plans, present it to council for approval, walk me through the sub process and then I can look for a builder to build them.  Sounds like I am doing nothing but putting in the money !!   Well I guess that is right as I'm also doing it this way to learn the process from head to toe (even though that means missing out on potential savings).  It also reduces the risks for us so it is attractive in our 1st situation. 

Hybrid trusts had the same feel as it was a mix of a unit trust and a family trust (from what I remember).  Again, there must be very good situations when setting up a hybrid trust would be affective but I don't believe that it included my situation at this point in time.  

Family trusts, on the other hand, looked like they ticked all the boxes, for my circumstances, but there was an issue I believe with how loses are managed within the trust.  As I am  starting out with investment and development I feel that I need to have more assets before such a setup would match my end goal.  I am confident that I will eventually setup a family trust or similar or many trusts and company's but I think that I'll have to wear the negatives of not creating them now to gain some of the positives of being able to claim against my personal income and taxes.  

I am hoping that I end up spreading assets between all natural and artificial entities, ie: some in my name, some in wife's name, some in both names, some in trusts, some in company's, some in a combination of both.  It looks like I have to start accumulating assets mostly in my name to begin with to try and get a possible boost giving me an opportunity to have enough wealth for further asset protection strategies to function as I want them to.  Sorry if you happen to disagree, just an opinion with the limited knowledge I have on these matters.

BTW: Do you have experience setting up "blood line" trusts?  Is there such a thing? They sound a lot like family trusts to me but are more restrictive.    I can't see the reasoning in restricting a trust that is primarily created to add options.  Let me know what you think.  

Thanks again to all.