Brisbane Property Networking Group Monday 29th October 2012 Accounting and Tax Issues for Property Developers

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 advisor to ensure that the information contained in this presentation is applicable to your own circumstances and issues. Liability limited by a scheme approved under Professional Standards Legislation.

Topics Covered Today ― Passive Property Investment power of depreciation ― GST and how tax works in development including the margin scheme ― Different tax treatments from a development ― Examples

― Purchase a property for $500,000 ― Rental Income is $26,000 ― Cash Costs (interest, rates, repairs etc) $39,500 ― Cash loss is $13,500 ― Depreciation is a non-cash tax deduction. Passive Property Investment – Power of Depreciation

Passive Property Investment (cont) ― On this property depreciation allowances are say $7,500pa. ― While the cash cost is $13,500pa to keep the property, the tax deduction is based on $21,000 (cash plus depreciation allowance) ― The tax saving is $8,085 (38.5% x $21,000 loss) ― Net cash cost now reduced to $5,415pa. ― Put lump sum off your personal home loan and it reduces 3.1 years off a $450k loan being paid over 15 years.

GST and Property Development ― GST applies at all stages of the development ― Its application and impact should be considered; ― During acquisition ― DA & BA ― Construction and ― Sale ― Check registrations –

GST and Property Development When to register: ― Carrying on an enterprise and turnover is over $75,000 of income ― Do not register unnecessarily, know the rules and seek advice.

GST Margin Scheme ― Concession on GST payable by the developer on the sale of certain new properties ― GST payable is reduced to one-eleventh of the “margin” ― Margin is the difference between the sale price and acquisition price only ― Only available where there is no input tax credit for the purchaser ― Both parties need to agree to the application of the Margin Scheme

Taxation of Profits/Losses from Property Investment & Development ― Passive property investment usually subject to capital gains tax; ― Active property investment can be subject to either capital gains tax or income tax. But not both together on the same portion of profit. ― Knowing which applies is about understanding the circumstances behind the investment.

Which tax will apply – a rough “rule of thumb” ― You have held the investment long term and have just decided to sell or realise in a profitable way – Capital Gains Tax could apply. ― You have made an investment with the intention of making a quick profit but are not carrying on a business – Income Tax could apply. ― You are a property developer in business with multiple ongoing projects – Income Tax will apply.

Scenario 1: Mr C moved into a house, renovated it and sold it. He then does this again and again. ― Principal place of residence has no time limit on it so having genuinely made the house his PPR, there is no capital gains tax issues. ― However, the investment is not a passive property investment long term hold, more activity evident. ― The activity is likely to mean the Tax Office will consider this an income generating activity and apply income tax to the profits.

Scenario 2: Mrs M purchases a property, sub- divides, builds a new house and rents both. ― House purchased for an investment, no immediate intention to sell. ― Income derived is residential rental which is input taxed. ― Although the new property is a “new residential premises” under the GST definitions, the activity of Mrs M means she does not need to register for GST as she is not carrying on an enterprise ― Ultimately the sale will be subject to capital gains tax and GST would not likely be applied.

Scenario 3 – Purchased farmland from unregistered person to sub-divide and sell. ― Developer purchases farmland ― Vendor is unregistered as although they have a business, turnover is only $55,000 pa. ― Sale price is say $2,000,000 ― Purchaser insists on vendor registering for GST although there is no need to register as the proceeds are a capital receipt to the farmer

Scenario 3 - (cont.) ― Vendor agrees to register for GST but increases price to cover GST component. ― No disadvantages for the vendor now ― Developer pays money in stamp duty ― Margin Scheme can not applied to the sale of their developed product ― Additional costs to developer were $192,318

Scenario 4 - Jack purchases a house block with the intention of sub-dividing and then building a new house ― The existing house needs some basic renovations which he will also undertake. ― Once the new house is completed Jack is planning to sell the properties and take the –hopefully – good profit and use it to pay off some debt on his house.

Scenario 4 (cont) ― Need to consider GST and the application of tax to the transaction. ― For the existing house; ― Minor cosmetic renovations will not create a “new residential premises” for GST purposes. ― GST will not apply to the sale of the existing premises. ― The quick sale of the house would tend to see income tax applied to the sale as opposed to capital gains tax.

Scenario 4 (cont) ― New house will be a “new residential premises” ― Proceeds likely to be income in nature as not a long term hold. Profits taxed under income tax law. ― Entity needs to register for GST and GST will apply to the sale of this property. GST credits can be claimed in relation to the new house only. ― Margin scheme could be applied on the sale.

Scenario 5 - Multiple Unit Project keeping some ―Development undertaken at Sandgate. ―Ten new townhouses were constructed but only eight sold. The developer had planned to keep 2 of the units at the completion of the project. ―The remaining two townhouses are rented out and sold after three years.

Scenario 5 – (cont) ―Development undertaken with the intention of making a profit. Proceeds will be taxed under income tax legislation. ―As income, the entity needs to register for GST and charge GST on the sale of the 8 units sold. ―As the intention was not to sell the other 2 units, the income derived from them will be rent – input taxed. Look to apportion GST claim on inputs to 80% of credits (being 8 units out of 10).

Scenario 5 – (cont) ―At the completion of the initial sale of 8 units, the entity can deregister for GST as it is no longer carrying on an enterprise. ―There is no GST apportionment or clawbacks as this has already been done ―Subsequent sale is capital in nature so no need to re-register. ―Sale should be GST free ―Also able to claim building allowance as acquired on a capital basis.

Scenario 6 – Strata Title Units ―An apartment block is purchased by an investor who then proceeds to strata title off the units. ―The strata title process does not in itself create a new residential premises. It would be relevant if substantial work was required to the units to make them saleable however this would come under provisions regarding substantial renovations.

Summary ―CGT, income tax and GST can apply in different ways and at different times during your development. ―Understanding how they work and having advisors experienced in the property industry can help to save you from making costly mistakes.

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.