Gold Coast Property Network Tuesday, 23 October 2014 Accounting and Tax Issues for Property Developers

Topics Covered Today ― Most common legal structures for property development ― Advantages and disadvantages of the most popular structures ― GST and the margin scheme

Disclaimer The information contained in the presentation today is general in nature and should not be relied upon by anyone without first consulting a professional on the application of any of the information to their circumstances and their own issues.

Five Basic Structures 1.Individual or Sole Trader 2.Partnership 3.Company 4.Trust 5.Superannuation Fund ―Company and Trust are most common

Private Proprietary Company Advantages of Company Structure: ― Company is a separate legal entity so can limit personal liability ― New investors can easily be admitted as a shareholder ― Flat rate of 30% tax ― Shareholders have a definable entitlement ― Profits can be retained in the 30% tax environment

Private Proprietary Company Disadvantages of a company structure : ― 50% exemption for capital gains tax not allowed ― Difficult for tax-free amounts to pass to shareholders ― Directors can still be held personally liable ― Can not distribute losses to shareholders

Unit and Discretionary Trusts ― Unit Trust: used by non-related investors looking to ensure their investment entitlements are clearly identifiable ― Discretionary Trust: generally used by family groups and have no fixed entitlement to income or capital. Distributions are at the discretion of the trustee

Unit Trust Advantages of a Unit Trust: ― Provides asset protection when used with a corporate trustee – Not for the individual investor ― Unit holders have a fixed interest and entitlement ― The 50% CGT discount is available ― Profits can be passed out to investors without tax having to have been paid which can be seen by some investors as a benefit

Unit Trust Disadvantages of a Fixed Trust: ― Can not distribute losses to individual investors ― Income must be distributed at year end or is taxed at highest marginal tax rate

Discretionary Trust Advantages of a Discretionary Trust: ― Can be used at the investor entity or the developer ― Liability can be limited using a corporate trustee ― Flexible capital and income distributions ― Access to the 50% CGT discount ― No restrictions on tax free distributions

Discretionary Trust Disadvantages of a Discretionary Trust: ― Can not distribute losses to beneficiaries ― Beneficiaries do not have a transferrable interest

Self Managed Superannuation Fund (SMSF) ― An SMSF can not generally undertake a development directly ― Main use is as an investor to receive profits and an additional source of capital ― An SMSF is a variation of a trust structure so requires a trustee and deed

Self Managed Superannuation Fund Disadvantages of a Superannuation Fund: ― Difficult to access profits ― Highly regulated and restricted operations ― Can impact on your ability to borrow

Trust Structure – Working Example Syndicate Structures Then one from the Audience

Revenue & Capital Receipts Leading on from structuring is the taxation of income from developments when they are completed. Three main categories of revenue: – Ordinary Income – Capital Gains – Profit from a one off venture with a profit making intention

Investment Land to be Developed ― Marie acquired her house in 2002 and it sat on 1.5 hectares. ― She obtained a DA and then developed the property into 15 lots ― She sold off the lots. She had never developed before and was retiring after that. ― CGT issue ― As capital – NO GST to consider either.

Consider Brendale Industrial Development ―Development undertaken at Brendale. ―Ten new sheds constructed but only eight sold. ―Remaining two sheds are rented out and sold after three years ―As last two sheds no longer trading stock – they are subject to capital gains tax on sale ―GST will also need to be considered

GST and Property Development ― GST applies at all stages of the development ― Check registrations –

GST and Property Development Many issues to consider but selecting two to discuss and build some knowledge around are: ― When do I register for GST? Carrying on an enterprise Turnover exceeds $75,000

Margin Scheme ― Concession on GST payable on the sale of certain new properties ― GST payable equals to one-eleventh of margin ― Calculation of acquisition price ― No input tax credit for a purchaser ― Both parties to agree to the application

BAS & Record Keeping ― Reviewing your financial position on an ongoing basis is just common sense ― Cloud Accounting Software – XERO done as a monthly subscription ― You start with the numbers by reviewing your feaso – don’t stop after that. ― Sloppy record keeping = Bad outcomes.

BAS & Record keeping What can happen from not knowing your financial position? ― Cost over runs not identified quickly ― Profit reduces increased project risk ― Run out of money prior to completion ― Make sure you have access to accurate and timely information

Conclusion Having assisted property developer clients for 50 years, William Buck have a unique knowledge and expertise concerning this industry. We are happy to assist with any accounting and taxation queries or advice that you may require.