Our 1st Development
- Thread starter Thunder
- Start date
Truthfully, it was just an arbitrary figure I put in at the marginal tax rate. Depends how long we hold for.
There's 3 scenario's if my understanding is correct (I'm no accountant!):
- sell less than 12 months, no CGT exemption, plus GST on margin = approx $140k
- sell after 12 months, get CGT exemption, plus GST on margin = approx $85
- sell after 12 months, get CGT exemption, no GST on margin = approx $55k
So I chucked in the marginal rate for now until my account crunches the numbers. Paying $140k is clearly not desirable unless we want to do it all again in a hurry and have capacity issues.
Thanks Westminster, love your work so appreciate your comments.
The location is....yeah not telling
I put in $10k for demo in the build costs, its a tiny 2br weatherboard, I could blow it over.
See my reply's above re contingency, beams, laundry and stairs.
Thanks
Saw the comps too
... I think however end value will be very much dependent on location/proximity to CBD.Sounds good
Not brave or crazy. With all the background work you have done, talking to local REAs and looking at comps, I would say sensible move. Looks like a great project and I will be following with interest.Hi all
After heaps of researching we?re embarking on our first development of 2 townhouses and thought I?d share our journey. Brave or crazy we?re not sure but here we go!
Id take sanj's advice and make sure you have a good accountant looking at the numbers. It sounds like you're nit picking the best of 2 different scenarios depending on when you sell. It should be the other way around. It is either this or the other scenario then you look at when to sell and the tax implications.
Great work and congrats on starting your own project. I have been doing research on my first project as well. Haven't had any luck finding a suitable site based on my calculation, maybe I should look somewhere else. I have been focusing on areas around my because a) budget and b) proximity to my house ( i know i am lazy.Hi all
After heaps of researching we?re embarking on our first development of 2 townhouses and thought I?d share our journey. Brave or crazy we?re not sure but here we go!
). Have you had any issues with using local builders ?Hi Sanj, yep am happy with our accountant, he's been with us through some complex stuff for about 10 years. In fairness to him though I've had only high level discussions and I've just recently given him a full set of my P&L.
On the topic of CGT vs income tax, we've purchased via a family trust which (as I understand it
) will distribute the gain and yes we then pay income tax at our respective marginal rate. The CGT exemption applied (or not) will depend on the intention and timeframe, which will reduce that gain amount that's distributed. Anyhoooo.... Tax is boring but necessary so my job is to make a profit and the accountant and tax man can figure out what is portion is legally Tony Abbotts
Great work and congrats on starting your own project. I have been doing research on my first project as well. Haven't had any luck finding a suitable site based on my calculation, maybe I should look somewhere else. I have been focusing on areas around my because a) budget and b) proximity to my house ( i know i am lazy.
Thanks but it ain't over til the fat lady puts the money in the money in the bank
Haven't started construction so time will tell re the builder. So far he's been very helpful (and free
) and we're both focused on the long term opportunities if this is successful.Good luck with your search, it is frustrating but at least you know what numbers will make or break.
Sounds like Barwon Waters who are real sharks and a PITA.
Geelong or the Bellarine Peninsula.
Hi Sanj, yep am happy with our accountant, he's been with us through some complex stuff for about 10 years. In fairness to him though I've had only high level discussions and I've just recently given him a full set of my P&L.
On the topic of CGT vs income tax, we've purchased via a family trust which (as I understand it
Anyhoooo.... Tax is boring but necessary so my job is to make a profit and the accountant and tax man can figure out what is portion is legally Tony Abbotts
Just to let you know that if it's in a Trust then its pretty much 99% of the time not going to be CGT but your accountant will tell you that when you talk to him about it. It will distribute the profits and you will pay income tax on it (and GST if you sell within 5yrs)
Thanks Westminster, love your work so appreciate your comments.
The location is....
I put in $10k for demo in the build costs, its a tiny 2br weatherboard, I could blow it over.
See my reply's above re contingency, beams, laundry and stairs.
Thanks
Demo costs may blow up if asbestos needs to be removed prior. I'm doing something similar to an ancient 2br weatherboard house and demo cost with asbestos removal was about 30k ballpark. Will be getting an inspection for an accurate quote later.
Hi all
After heaps of researching we?re embarking on our first development of 2 townhouses and thought I?d share our journey. Brave or crazy we?re not sure but here we go!
We?ve purchased a small corner block (563sqm) in a regional city with an old house that has demo approval. Have been through set up of a trust structure, settlement and now working on prelim plans. Already hit a speed bump with our draftsman and dropped him like a hot potato. We?ve connected with a local builder and working with his drafty, so far so good.
The rough numbers estimated at outset:
Land $212k
Purchase Costs $32k
Build Estimate incl demo $495k
Working drawings $40k
Contributions $48k
Contingency $25k
Interest $38k
TOTAL $890K
SALE/VALUATION $1.2m
Project Profit $310k
Tax @37% $114k
NET PROFIT $196k
Attached are our draft plans, respect and appreciate your feedback.
- Our intention is to hold so tax is worst case.
- I?m expecting the contributions to be more, call me sceptical.
- Build estimate based on 2 x 186sqm (20sq) @ $1300. With the prelims in hand the sqm size is bigger than I expected would fit, so already looks tough but expect upside in the valuation at the other end.
- Sale/Valuation based on a development 500 metres down the road, sold for $600k each @ 18 squares.
- Target for this market and location is downsizers and professionals.
- Conservative rent estimate is $515 pcw each so if we have to hold should yield circa 5%.
Cheers,
Thunder
I think your tax is pretty close. As others have said. If you sell one within 5 years you will be subject to GST (not CGT).
I calculated it roughly at $122k. You may get stung a bit more on this depending on the tax rate of the trusts beneficiaries.
Blacky
On the (boring) topic of tax, I had a look in my email archive for the correspondence from our accountant when we first contemplated developing, asking how tax is calculated for a developer who holds 2, holds 1 or holds none.
Thought I'd share (without prejudice!) just for fun.
FROM ACCOUNTANT
This is an interesting question and is dependent on the facts surrounding your circumstances. I have provided some notes for your review below and also attached a recent Taxpayer Alert which is relevant to your structure.
Items to consider
The first consideration is whether the property is Capital or Revenue in nature.
o Income will be treated as Capital where the intention is to hold the property for investment and capital appreciation purposes. Under this treatment, you may be eligible for the 50% CGT discount.
o Income will be treated as Revenue where the intention is to turn over multiple properties in a short period of time for the purpose of making profit. Under this treatment, you will be deemed to be running a business with purchases and sales of properties forming trading income and expenses. No capital gains will be reported and therefore no discount.
If you build 2 new townhouses and hold one your intention is split between Capital and Revenue. That is, the townhouse that you will retain is likely to be treated as Capital and the townhouse you intend to sell is likely to be treated as Revenue.
In regards to the townhouse retained, you may be eligible for the 50% CGT discount where the asset is held for more than 12 months. Points to note include:
o A building or structure is considered to be a CGT asset separate from the land where these were acquired at different times. The capital gain will need to be calculated separately for each CGT asset.
o In calculating the amount of capital proceeds to be attributed to each asset, you must take whatever steps are appropriate to work out their value. If you make an estimate of this amount, it must be reasonable and you must be able to show how you arrived at the estimated amount.
o The 12 month rule will need to be applied against each asset and CGT event to determine eligibility for the 50% CGT discount. The contract date will be the commencement of the 12 month rule.
o The CGT discount will not apply to a capital gain if the CGT event that occurred later than 12 months after acquisition was the result of an agreement entered into within that 12 month period. Any arrangement entered into within 12 months of acquiring an asset which leads to disposal of the asset after the 12 month period, may be caught by the anti-avoidance rules.
GST implications in regards to ?New Residential? should be considered on the construction of the new townhouses.
This area of taxation law is comprehensive and differs substantially based on your circumstances. Should you wish further advice on this matter, we will be happy to provide a scope and quote for these services.
REPLY
Many thanks for this. One point of clarification. At the point of sale and distribution of the gain from the trust to us as beneficiaries:
? the gain is added to our personal income and we pay tax at the personal rate ? correct?
? Do we/can we incur company tax via the trustee as it?s a lower rate?
Cheers,
FROM ACCOUNTANT
That is correct, the Trust distributes all of its income each year to the beneficiaries and it is then taxed in the beneficiary?s hands.
In regards to Capital Gains income, an individual will be entitled to the 50% discount where the asset has been held for more than 12 months. This reduces the tax rate to 23% (or less depending on tax brackets and taxable income) which is below the company tax rate of 30%.
Companies are not eligible for the 50% discount on capital gains and therefore all income will be taxed at 30% in a company.
A corporate beneficiary can be effective when the income is not capital gains, however there is still the potential for additional tax being paid by the individual shareholder of the company when dividends are subsequently declared to get the funds out of the company eventually.
Thought I'd share (without prejudice!) just for fun.
FROM ACCOUNTANT
This is an interesting question and is dependent on the facts surrounding your circumstances. I have provided some notes for your review below and also attached a recent Taxpayer Alert which is relevant to your structure.
Items to consider
The first consideration is whether the property is Capital or Revenue in nature.
o Income will be treated as Capital where the intention is to hold the property for investment and capital appreciation purposes. Under this treatment, you may be eligible for the 50% CGT discount.
o Income will be treated as Revenue where the intention is to turn over multiple properties in a short period of time for the purpose of making profit. Under this treatment, you will be deemed to be running a business with purchases and sales of properties forming trading income and expenses. No capital gains will be reported and therefore no discount.
If you build 2 new townhouses and hold one your intention is split between Capital and Revenue. That is, the townhouse that you will retain is likely to be treated as Capital and the townhouse you intend to sell is likely to be treated as Revenue.
In regards to the townhouse retained, you may be eligible for the 50% CGT discount where the asset is held for more than 12 months. Points to note include:
o A building or structure is considered to be a CGT asset separate from the land where these were acquired at different times. The capital gain will need to be calculated separately for each CGT asset.
o In calculating the amount of capital proceeds to be attributed to each asset, you must take whatever steps are appropriate to work out their value. If you make an estimate of this amount, it must be reasonable and you must be able to show how you arrived at the estimated amount.
o The 12 month rule will need to be applied against each asset and CGT event to determine eligibility for the 50% CGT discount. The contract date will be the commencement of the 12 month rule.
o The CGT discount will not apply to a capital gain if the CGT event that occurred later than 12 months after acquisition was the result of an agreement entered into within that 12 month period. Any arrangement entered into within 12 months of acquiring an asset which leads to disposal of the asset after the 12 month period, may be caught by the anti-avoidance rules.
GST implications in regards to ?New Residential? should be considered on the construction of the new townhouses.
This area of taxation law is comprehensive and differs substantially based on your circumstances. Should you wish further advice on this matter, we will be happy to provide a scope and quote for these services.
REPLY
Many thanks for this. One point of clarification. At the point of sale and distribution of the gain from the trust to us as beneficiaries:
? the gain is added to our personal income and we pay tax at the personal rate ? correct?
? Do we/can we incur company tax via the trustee as it?s a lower rate?
Cheers,
FROM ACCOUNTANT
That is correct, the Trust distributes all of its income each year to the beneficiaries and it is then taxed in the beneficiary?s hands.
In regards to Capital Gains income, an individual will be entitled to the 50% discount where the asset has been held for more than 12 months. This reduces the tax rate to 23% (or less depending on tax brackets and taxable income) which is below the company tax rate of 30%.
Companies are not eligible for the 50% discount on capital gains and therefore all income will be taxed at 30% in a company.
A corporate beneficiary can be effective when the income is not capital gains, however there is still the potential for additional tax being paid by the individual shareholder of the company when dividends are subsequently declared to get the funds out of the company eventually.
The fun begins
Hi folks
Just an update on progress. After a sterling effort by our drafty to turn around prelims in 3 weeks, we submitted our prelims to council late Nov and received a "please explain" letter in early Jan. Fundamentally the council has an issue with 2 key things:
1) having 2 x double garages facing the street, they'd prefer to have one of the garage around the corner as they believe all the other homes in the street have single garages (not entirely true, so we're gathering info on the neighbouring properties).
2) The size of the 2 lots on the block they consider to be quite large and want the externals of Lot 2 to "address" the street, plus set back the upper level on the corner lot.
The second point can be overcome, so no biggy.
The problem is point 1, moving one of the garages around the corner removes the north facing natural light from the living space, so not ideal. We went back to council and suggested darker coloured garage doors to minimise their appearance, separating them and adding landscaping to divide the 2 properties. The town planner is now digging in, saying its out of character with the street and they'd prefer single garages instead.
Both options will impact the end value so we're cautiously trying to negotiate. We'll talk to neighbours to see if they have a concern and build a case for examples in the area.
Fully expecting this will take time and need to weigh up the time vs end value impact. Not to worry, I'm sure this is the first of many challenges.
Hi folks
Just an update on progress. After a sterling effort by our drafty to turn around prelims in 3 weeks, we submitted our prelims to council late Nov and received a "please explain" letter in early Jan. Fundamentally the council has an issue with 2 key things:
1) having 2 x double garages facing the street, they'd prefer to have one of the garage around the corner as they believe all the other homes in the street have single garages (not entirely true, so we're gathering info on the neighbouring properties).
2) The size of the 2 lots on the block they consider to be quite large and want the externals of Lot 2 to "address" the street, plus set back the upper level on the corner lot.
The second point can be overcome, so no biggy.
The problem is point 1, moving one of the garages around the corner removes the north facing natural light from the living space, so not ideal. We went back to council and suggested darker coloured garage doors to minimise their appearance, separating them and adding landscaping to divide the 2 properties. The town planner is now digging in, saying its out of character with the street and they'd prefer single garages instead.
Both options will impact the end value so we're cautiously trying to negotiate. We'll talk to neighbours to see if they have a concern and build a case for examples in the area.
Fully expecting this will take time and need to weigh up the time vs end value impact. Not to worry, I'm sure this is the first of many challenges.
Following... Good luck dealing with the planners, ghastly folk.
You Could think about staggering the line of the two garages and try to recess a little further behind the front wall. A little tinkering, appropriate use of colours/materials and photos of similar outcomes in your area should see you on the right track. If you included a clause 55 assessment in your application it might be worth pointing out how Councils suggestion would result in several non-compliances.
You Could think about staggering the line of the two garages and try to recess a little further behind the front wall. A little tinkering, appropriate use of colours/materials and photos of similar outcomes in your area should see you on the right track. If you included a clause 55 assessment in your application it might be worth pointing out how Councils suggestion would result in several non-compliances.
well done Thunder.
may i ask if finding your development site difficult? i live in Sydney and to find a profitable site is very difficult as the site is already expensive and require alot of existing capital to start.
may i ask if finding your development site difficult? i live in Sydney and to find a profitable site is very difficult as the site is already expensive and require alot of existing capital to start.
Thanks for being brave or crazy Im both.
Im both.
