April 2011

2. Structures for InvestorsPresented by: Kerrie-Anne BaileyKAS Tax & Business SolutionsPhone: (07) 5585 2100Email: kerrieanne@kasolutions.com.au April 2011

3. Agenda • Getting the most from your investment property • Capital Gains Tax • Tax considerations for property development • Structuring with another party • Case Study

4. 1. Getting the Most from your Investment Property

5. Taxable Income • TAXABLE INCOME = • ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS • Increase your deductions and the taxable income decreases • Consider the list of deductions page 11

6. Deductions - Depreciation • Depreciation • Low cost assets – immediate write off • Balancing adjustments on sale • Capital Works • Engage a quantity surveyor they save money!

7. Repairs and Maintenance  • You Can Claim: • Repairs and maintenance directly related to the wear and tear of the property from renting it out • You Can’t Claim • Replacements – replace a fence of kitchen • Improvements – landscaping, renovations • Initial Repairs – repairs existing at purchase 

8. Interest and Borrowing Expenses • Deductible so long as it is incurred to gain or product income • Need to consider the purpose of the borrowing • Careful if you mix investment borrowings with private borrowing • Borrowing expenses – lesser of 5 years or loan term

9. 2. Capital Gains on the Sale of your Investment Property

10. Capital Gains • Capital Proceeds • LESS: Costs • EQUALS Gross Gains • APPLY: Losses – Current or Carry Forward • LESS: Discounts available • EQUALS: Net Gain – to be included in Assessable Income

11. Taxable Income • TAXABLE INCOME = • ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS • Net capital gains goes into assessable income • Decreasing capital gains reduces taxable income

12. Capital Gains Rules • Date of acquisition for capital gains is the date the contract was signed • Capital Proceeds are the amount you receive for sale • Cost base – includes a number of facts – refer page 12 • Record Keeping Reduces Capital Gains – refer page 17 for checklist

13. Capital Gains Case Study • Read page 12 of notes • Have a go at the answer!

14. Capital Gains - Example • Bought property in May 2008 $200,000 including $10,000 of plant • Stamp Duty: $25,000 • Jan 2010 spent $30,000 on improvements and claimed $125 in capital works • Sold for $500,000 including $2,000 of plant • Sale Costs: $12,000

15. Capital Gains - Answer Capital Proceeds: $498,000 LESS: Cost-Purchase $190,000 - Purchase costs $ 25,000 - Improvements $ 29,875 - Sale Costs $ 12,000 $256,875 Gross Gain $241,125 Less 50% discount $120,563 net gain $120,563

16. 3. Tax considerations for property developments- Income Tax- GST

17. Taxation of Property Developments • Capital Gains i.e. Develop and Hold • Income i.e. Develop and sell • Trading stock i.e. Running a ‘property development’ business

18. Tax treatment – One-off transactions • Capital • Profit taxed as a ‘capital gain’ under CGT provision • If owned > 12 months ….. 50% CGT discount may apply • Taxed in the year the contract is signed • Income • Profit tax as ‘income’ (i.e. sale proceeds less costs) • Taxed in the year the property is settled • GST Issues

19. GST on Property Development • Do you need to be registered for GST • Type of Transaction • Is there GST on the Transaction • What is the amount of GST

20. GST on Property • Do you need to be registered for GST? • Need to be carrying on an enterprise; AND • The turnover must be greater than $75,000.

21. GST on Property Note: * GST of 10% applies to sale consideration (unless margin scheme applies)

22. What is New Residential? • New Residential • Not previously sold as residential • Created through substantial renovation • Built to replace demolished premises • Note: Exemption if rented for 5 years • Substantial Renovations • Renovations must affect building as a whole • Must replace substantially all of the building

23. Margin Scheme • GST only payable on margin Margin = Sale Price – Purchase Price * * Purchase price excludes development costs • Note:You can not use the margin scheme if you claimed the full GST on the purchase

24. Margin Scheme • Apply the margin scheme when: • Purchaser is not registered for GST (i.e. cannot claim back any GST paid) • Benefit: margin reduces the sales price  • Do not apply the margin scheme when: • If property purchase had GST 

25. Case Study Facts • Homer is a builder and registered for GST • Purchases land with no GST for $150,000 • He paid $1,100 in legals and $7,000 stamp duty • He builds a house for $110,000 and sells it for $325,000 If he applied the margin scheme: • Margin will be $175,000 (i.e. $325,000 less $150,000). • GST will be $15,909(i.e. 1/11th of the margin) • Claim input tax credits of $100 (legals) and $10,000 (building)

26. 4. Structuring with another person

27. Purchasing Entity • Tax effectiveness • Risk Factor / Asset protection • Compliance costs • Other issues • – do you understand the structure? • – will the bank lend against it?

28. Different structures • Sole Trader • Partnership / Joint Venture / PSA • Company • Trust • Super Fund • Refer p 40 for a summary of the entities

29. Joint Venture v Partnership • What is a joint venture for tax? • Not a separate tax entity • Sharing output • Refer p34 example – calling it a joint venture is not sufficient • What is a partnership for tax? • In receipt of income jointly

30. Accounting and Tax Treatment • Joint Venture - Each Joint venture participant is treated separately for tax and accounting • Partnership- Separate entity for tax need to lodged accounts and tax return for the partnership.

31. Joint Ventures and GST • Two options: • Deal with GST individually • Become an approved GST joint venture entity

32. Checklist • Refer to page 42 for a comprehensive checklist prior to forming your joint venture. • Joining with another person can be very effective but can also be problematic if you do not clearly outline the terms up front!

33. Profit share Agreement • This is a legal agreement between the parties • Usually a land owner engages a developer / builder to assist with the development of the land and the builder obtains a fee dependent upon the final profit • Each party retains their own tax profile • The developer does not have a disposal power over the land so the property is not treaded as trading stock for the developer

34. Case Study – Page 39 Facts • MrReno owns a block of land and Meets Mrs Build a developer and builder • They enter into a JV and construct 10 units. • Mr Reno contributes land and 10% of costs • Mrs Build contributes her skills and 90% of costs • At the end each party obtains 5 units • Mrs Build obtains a 50% interest in the land as tenant in common prior to commencing • Both parties agree to be a joint venture • Mrs Build is nominated to be the GST joint venture operator. Discuss? • GST / Tax / Stamp Duty

35. 5. Record Keeping

36. 6. Record Keeping • Keeping Records Saves Tax!!! • Purchase / Sale documents • Rental expenses – refer checklist in paper • Interest / Loan details – get it right! • Improvements and purchases • Capital Gains Tax receipts.

37. Questions? Presented by: Kerrie-Anne BaileyKAS Tax & Business SolutionsPhone: (07) 5585 2100Email: kerrieanne@kasolutions.com.au