Structures for Investors Presented by: Kerrie-Anne Bailey KAS Tax & Business Solutions Phone: (07) 5585 2100 Email: kerrieanne@kasolutions.com.au April 2011 The Ultimate Property Women Weekend- 9th & 10th April 2011

Agenda Getting the most from your investment property Capital Gains Tax Tax considerations for property development Structuring with another party Case Study The Ultimate Property Women Weekend- 9th & 10th April 2011

1. Getting the Most from your Investment Property The Ultimate Property Women Weekend- 9th & 10th April 2011 4

ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS Taxable Income TAXABLE INCOME = ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS Increase your deductions and the taxable income decreases Consider the list of deductions page 11 The Ultimate Property Women Weekend- 9th & 10th April 2011 5

Deductions - Depreciation Low cost assets – immediate write off Balancing adjustments on sale Capital Works Engage a quantity surveyor they save money! The Ultimate Property Women Weekend- 9th & 10th April 2011 6

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  The Ultimate Property Women Weekend- 9th & 10th April 2011 7

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 The Ultimate Property Women Weekend- 9th & 10th April 2011 8

2. Capital Gains on the Sale of your Investment Property The Ultimate Property Women Weekend- 9th & 10th April 2011 9

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 The Ultimate Property Women Weekend- 9th & 10th April 2011 10

ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS Taxable Income TAXABLE INCOME = ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS Net capital gains goes into assessable income Decreasing capital gains reduces taxable income The Ultimate Property Women Weekend- 9th & 10th April 2011 11

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 The Ultimate Property Women Weekend- 9th & 10th April 2011 12

Capital Gains Case Study Read page 12 of notes Have a go at the answer! The Ultimate Property Women Weekend- 9th & 10th April 2011 13

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 The Ultimate Property Women Weekend- 9th & 10th April 2011 14

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 The Ultimate Property Women Weekend- 9th & 10th April 2011 15

3. Tax considerations for property developments - Income Tax - GST The Ultimate Property Women Weekend- 9th & 10th April 2011 16

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 The Ultimate Property Women Weekend- 9th & 10th April 2011

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 The Ultimate Property Women Weekend- 9th & 10th April 2011

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

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.

(unless margin scheme applies) GST on Property Old residential New residential Commercial property Does GST apply? Input taxed Taxable supply Amount of GST? No GST 10% * (unless margin scheme applies) Note: * GST of 10% applies to sale consideration (unless margin scheme applies)

What is 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

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

  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 

Case Study Facts If he applied the margin scheme: 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)

4. Structuring with another person The Ultimate Property Women Weekend- 9th & 10th April 2011 26

Purchasing Entity Tax effectiveness Risk Factor / Asset protection Compliance costs Other issues – do you understand the structure? – will the bank lend against it? The Ultimate Property Women Weekend- 9th & 10th April 2011 27

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

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 The Ultimate Property Women Weekend- 9th & 10th April 2011

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. The Ultimate Property Women Weekend- 9th & 10th April 2011

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

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!

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

Case Study – Page 39 Facts Discuss? Mr Reno 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

5. Record Keeping The Ultimate Property Women Weekend- 9th & 10th April 2011

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.

Questions? Presented by: Kerrie-Anne Bailey KAS Tax & Business Solutions Phone: (07) 5585 2100 Email: kerrieanne@kasolutions.com.au The Ultimate Property Women Weekend- 9th & 10th April 2011