Hi all,
Myself and a friend are looking at starting a renovating for profit business and we have a few questions. However before the questions just letting you know what we had on our minds. We are intending to setup a partnership and eventually both work full time running the business, with the intent of selling a property every 3 or so months.
1. Will the business have to pay CGT upon sale? I don't think we would but wanted to check.
2. Are all of the repairs and renovations deductable at tax time or is it just the depreciation for the time the property is owned?
3. If a business makes over a certain amount of profit they have to register for GST, will this be included in this type of business if we make enough money?
4. Is a partnership the best setup for what we want? I have heard a little about trusts and companies being the trustee with us being the director of the company and the benefactor of the trust.
Thanks all for the help, I am sure I will have more questions come to mind. I also have a topic in the finance area if you want more info or you are savvy in that area.
Thanks
If you are doing this as a business then no CGT, just income.
Parternship of 2 individuals may not be the best idea, depending on the circumstances.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Get a accountant. Pay for some advice – $300 a hour might seem like a lot but it's invaluable when you get information from the correct person.
You would have to register for gst only in some circumstances. Most likely if you did a structural renovation, subdivision then yes you would, the threshold is only 75,000 (turnover not profit) which is pretty much one house easily. (Unless your buying in the middle of whoop whoop)
purely cosmetic renovations might not be subject to gst upon sale. But you have to look up the definitions of when a renovation becomes " substantial"
replacing fixtures and polishing floors etc might be seen as cosmetic. But rebuilding the back section of the house and adding a extension would become substantial.
The repairs and renovations are not deductible at tax time. Unless the property is rented. Work done before the property is tenanted cannot be claimed either as a deduction it must be depreciated (if going down the path of buy renovate and hold, a BMT tax deprecation and scrapping report should be done to maximize any deductions before you go ripping out the kitchen etc)
the repairs and renovation costs are simply your costs. Profit = Sale of house – House price + Reno costs + holding costs + purchase and selling costs
Thanks for your help guys. In regards to the structure of the company what would be a better idea? Our situation would be one of us working as a plumber earning 65k doing such contracting work, to help with the serviceability of the loans. I would work full time on the business until the banks can see that the business itself can service the loans, I have heard most banks need 24 months of financials with some OK with just 12. I understand some of the options available to us in regards to structure of the business, however I am a bit vague with trusts and I thought a company would be a bad idea as we would have to pay 30% company tax then individual tax as well. I have heard of setting up a company and a trust and having the company be the trustee however I need to develop my knowledge of this area, any help would be greatly appreciated.
Thanks.
I would set it up as 2 investors(partnership or company or 2 sole traders in a JV) who buy property and a company that does the reno/project work and bills the investors accordingly.
Lotsa ways you can set this up to take advantage of various aspects. You'll need good legal and accounting advice to take advantage of loopholes etc. Terry's pretty good as this stuff but he requires more than a few cappuccinos I believe
Plus you could have one investor invoice the other, for his management costs. Then you have the advantage that you are a lower risk, your not a renovator, your a professional, project manager. Would only need to get 1 year bas statements/tax return then.
There are an infinite number of ways (exaggeration maybe) to set something like this up. It will all depend on heaps of factors:
– individual circumstances
– which state
– stamp duty
– land tax
– your family situation
= asset protection issues
– succession issues
– degree of trust
– equity
– need to bring in more partners
etc
etc
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I tend to adhere to the KISS principle whenever possible.
The focus should be on;
- accessing funds;
- cash flow to fund full time employee
- minimising taxes
- distribution of income
The most logical approach is however to keep both parties in employment and pay professionals where appropriate and labourers to undertake most of the reno work. The principles can be more effective as employed individuals who can share the project management tasks.
I wouldn't flip these reno's either instead with careful selection the combined buying power of two individuals could enable the growth of foundation properties that have CG unlocked through reno's (enabling further leverage for other properties) and rental income that provides a 10%+ (minimum) as the income source to progressively go fulltime at a future date.
Buy, reno and flip is not a very judicious use of capital or a efficient growth strategy in this circumstance. Income should come indirectly through equity growth enabling further leverage to expand a portfolio and a growing portfolio selected well will underpin growth through cash flows from rental incomes.
I agree with freckle in this market I would not be flipping. Many times I have flipped a home but had it revalued at the end of the renovation. 80% of the time the valuation is higher then the end sales price. I could of keep 4-6 extra houses at a neutral rent (positive after depreciation and tax).
Unless you have a specific goal in mind for example.
you wish to flip 4-5 houses in a year to create a good cash piggybank and then shift into a larger development, after obtaining 1-2 years of self employed income. Then you could get a new job . Have the combination of 2 Incomes plus your self employed income and shift into a medium sized development which would get you a greater net cash return or a better choice of new property to hold for growth./ income.
Also it gives you experience in low value real estate first unless you have a mentor to advise on property development and or advisers.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
