'You Get What You Pay For' Also Applies To Bookkeepers
A common thing that I see is business owners may not know enough to outsource this component appropriately, and they might put too much trust in a bookkeeper who doesn’t have the skillset to be able to offer advice to that client. We typically see this when clients go direct to offshore bookkeepers – It’s a big one that pops up. They kind of just do what they’re told, and the business owner doesn’t really know what to tell them. Or, you get the cheap ones who are really, really cheap bookkeepers who really aren’t skilled enough to be advising a solid business.
Having proactive conversations with your bookkeeper is key as well, and to really understand what you want to see on your P&L and on your balance sheet. Once you give them that vision, they actually have the skills and expertise (assuming they’re good enough) and they will be able to deliver on that.
Consistent touchpoints with your bookkeeper is also important to keep things up to date as your business changes. As other new expenses come in, you want to make sure that it stays on quality. Think of your bookkeeper as if it’s your accounts department – If you’re a big business, they have a whole dedicated department for this. You’re the CEO. You want to be having meetings with the heads of department, if that makes sense. They’re not just there to “get my BAS done” – It’s really, really important to have that conversation and stay on top of it.
Tax Structures Of Business vs Capital Developments
When comparing Business vs Capital developments, It’s not black and white when it comes to legislation. There’s a lot of case law that supports arguments either way. Unfortunately, you get a worse tax outcome with business – but that’s what’s going to be most developers. Most property developers are going to be seen as “people running businesses”, but you will be taxed in most cases on a income tax perspective, and because the sale of a house (or any sort of business), we’ve got to consider goods and services tax – it can actually be a big chunk of your intended profit.
There’s very rare cases where we would say a property development is on a capital basis; I think the words that they use is a “mere realisation of an asset”. Some examples where your development might be on capital, is where you’ve owned a family home for a number of years, you’ve got a fairly big backyard, and you want to sell either the backyard or the whole thing. Before you do that (because you want to be savvy about it and make some money on the way out) you’ll approach council, subdivide the backyard (and up to you whether you build on that) and sell the block of land at the back separate to your own home. We need to look at so many things around that, but that could be a situation where we can look on a capital basis, where the tax outcome is a bit better, and you might even get a 50% discount from a capital gains tax perspective.
Some other things as well with capital is, you’re kind of stuck in the structure that you’ve owned it in. If it’s the family home for instance you might own that in a personal name, and we need to look at the tax outcome of that – as an individual, the highest rate of tax is 47%, or depending on HECS and all that sort of thing it could even be higher as well.
In terms of capital, the final thing I’d say is; don’t play with fire. If you’ve decided whatever the thing is capital with you and your advisors, and it turns out that it’s a business rather than just a mere realisation of an asset, that’s not going to end well from an ATO perspective.
We’ve had some clients where you can argue either way – we’ve got to go into detail, look at each scenario, even get advice from tax lawyers, depending on the situation.
This is the biggest question. If you’re looking to buy a property, develop it, and then sell whatever you produce (and do that rather quickly), that’s for sure going to be looked at as a business or on an income tax basis, rather than a capital.
Watch This If You're Afraid Of Doing Your Taxes
Recently, on The Sharon Cliffe Podcast (@sharoncliffe), we talked about the fear of money in business, the fear of the unknown and what you need to do to be more comfortable around your finances.
Sharon: A lot of conversations that I have with female entrepreneurs and business owners in general (and myself included), is that the finance and money side of business really scares people. It does bring up a fear because you love the marketing side, you love the customer-service side of it, and you love the entrepreneur side, but the finance and money side does scare a lot of people.
What are the tools and strategies that you’ve helped clients with to actually overcome that fear of money and the financial side of the business?
Ben: I haven’t researched studies on this, but my gut feel on this, is it’s actually to do with the fear of the unknown. When I look at stuff I’m scared of, it’s because I usually don’t understand it.
I was noticing with my daughter, Rose, she started to notice shadows and she was wigging out so much because my shadow was moving. And I said, “No, no, no! That’s daddy’s. That’s Rose’s. That’s daddy’s.” and trying to calm her down and explain, “Hey, this is all normal. We’re all good.” But because she didn’t really know what it was, she was starting to freak out. I think that’s the same with numbers because it is quite complex, and as your business grows, the thing that you need to worry about changes.
My tip is to actually work with someone who can coach you through the stuff you need to know about, and to be able to manage things like the ‘magic number’. That’s something that I believe all business owners should know – like how much tax to set aside, and then you’re not going to get caught off guard when you lodge your BAS or your tax return’s due. There’s just things you can do to know the stuff that you don’t currently know.
Listen to the full interview at https://www.sharoncliffe.com.au/blog/episode-6-ben-walker-the-3-keys-to-wealth-creation
5 Things Business Owners Need To Know Before Getting Into Property Development
- Income tax will be payable on developments that aren’t capital, and most developments will be on an income tax basis. So choose your structure wisely: this includes your company trust, and individual name.
- CGT will be payable on developments that are ‘capital’; It’s a very small percentage, It might be that backyard that you’re subdividing and selling. And, we can apportion main residence exemption – the calculation to apportion a gain when you subdivide your backyard is pretty intense, but it’s a more favourable tax outcome if it’s considered capital in nature.
- GST will be payable on developments that aren’t ‘capital’. If you develop something and you’re going to hold it long-term, and the developer doesn’t rent it out, then you may be able to avoid paying CGT when you eventually sell it. The length of time to hold that property is not crystal clear in legislation – it’s in case law.
I’ve seen things like roughly five years to rent out an asset before you sell it where it’s considered a rental property, rather than you selling stock that you’ve built. You don’t want to play around with this stuff – you don’t want to say, “Oh yeah, I’ve rented it out for six months to avoid GST.” It just doesn’t work like that. GST might be a necessary evil in a way.
There is a bit of saving grace there; If you’ve purchased your land or your site and it’s had GST on it, then you may be able to claim that GST on your purchase. If you’ve heard of the “margin scheme”, it basically says you pay GST on your profit, rather than on the sale price, and that’s for benefit if you’ve acquired a site that you haven’t paid GST on.
So let’s say you paid $2,000,000 for a block of land and you can’t claim GST because it wasn’t a GST supply, then the margin scheme (if you can apply it) allows you to just pay the GST on the profit, which is pretty exciting than paying full whack on your sale price.
- Stamp duty is a state-based tax and it’s paid on the purchase of your site. Keep your buyer in mind – once you develop your property and sell that to the buyer, the buyer will need to consider stamp duty as well. This amount varies from state to state – In fact, I think New South Wales has recently gotten rid of it for certain purchases (which is pretty exciting).
All of these are things you need to work out before you get into it. You need to determine what your tax impact is, and how that plays out in your feasibility.
- The last one is land tax, which is state-based again. In Queensland at 30 June, the OSR takes a snapshot of who owns what property at 30 June, and they’ll send you a nice little land tax bill. So that can also come into play when you’re looking to sell blocks, and selling them before 30 June in a year might mean the difference between paying land tax on that block or not. Keep in mind if you’re doing land for instance, when you go on and register your title on that land, if you own that at 30 June, you’ll get a nasty bill, versus the block before it was developed would be a lot less land value per square meter.
Watch the full webinar at https://insp.red/webinarstructuringpropertydev
High-Level Structures For Tax Efficient Property Development
Here’s some high-level things we need to think about when we’re approaching the structure of carrying out a development.
Income Tax
How does that play out? If you buy it in a personal name, then you’re looking at upwards of 47% tax, depending on your marginal tax rates.
Structuring Through A Company
Depending on the setup, you might pay 26% tax if you’re classed as a business, or 30% tax if it’s a bucket company or it’s seen as investment income.
Structuring Through A Trust
At the end of the day, you actually choose who gets the profit of the development. If it’s a profitable development, Income tax could be one of your biggest taxes. So getting that right is critical and that relies heavily on your structure.
If you want to learn more, watch “Structuring property development in trusts, companies & SMSFs” through my e-learning page FREE at https://insp.red/webinarstructuringpropertydev
What You Need To Know About Land Tax
In terms of the structure; once you’ve purchased a property, it’s usually whoever holds the land will become the seller once you develop it.
For instance, if you buy a block of land in a company and develop it, the company will still own those blocks of land at the end of it – so really, that’s your development entity. You’ve really got to get the right structure before you purchase the land or the site. If you do want to change it later, you’ve got to consider stamp duty as well. Even if you’re selling it to a related entity at least in Queensland, the Office of State Revenue still takes a chunk out for stamp duty.
We have had clients where we actually change who owns the block or the site, for various reasons, but one of them may be that it could be a better tax outcome. We might want to use a company, but a trust gives us that flexibility of where the profit goes at the completion of the development.
If you would like to learn more about structuring property development in company, trusts or SMSF’s check out my e-learning page FREE at https://insp.red/webinarstructuringpropertydev
3 Ways To Fund Property Development
The way you fund a development varies from client to client. The easiest of it all would be if a client is self-funded. However, because of the cost of land and construction on top of that, usually someone needs funding from a bank or (and what we’ve seen recently is) using the help of superannuation.
Depending on your structure, bank funding is a little bit less complex in most cases than funding through super where you basically just apply to the bank for a loan. However, it depends on what you’re funding. If you’re funding the property purchase, that’s a lot simpler than going to fund the development itself and getting development finance which is usually; higher rates of interest, a few more hoops to jump through and they will lend you less as a LVR than if you’re going to buy a standard property from the bank or just a rental property.
So whether you’ve got all the cash you need in a bank already to carry out the development, or you need access to superannuation, bank finance or developer finance – they’re the three different ways to fund property development.
4 Key Points About Development In A Discretionary Trust
A discretionary trust is very simple; it’s not a very complex trust structure at all.
The limitations of a discretionary trust is that only one family can be involved in the development, at least the entity that carries out. If someone’s got two different families going into a development, I personally wouldn’t be using a discretionary trust because you don’t own a fixed entitlement to that trust. So, it’s simple but it’s limited.
You could access bank funding with a discretionary trust, and you can’t use your own super to fund the project, unless it’s other parties. I guess if it’s not your super, then you could explore getting a loan from someone’s SMSF if they’re an unrelated party.
Discretionary trusts aren’t common for us, because usually our developments will involve multiple different families; usually two or three or more. But occasionally we do have the odd one who we do discretionary trusts for. We can even do partnerships of trusts, for example if you’ve got different brothers and sisters who are going in on the development, so they can have a split.
Learn more about structuring property development in trusts, companies & SMSF by watching the webinar replay on my e-learning page at https://insp.red/webinarstructuringpropertydev
What’s The Maximum Number of Unit Holders We Can Have?
How Much Money Do You Need To Start An SMSF?
There’s no black and white number there – it depends on what you want to do with your super, and you also want to make sure it’s not a silly financial decision.
If you go and Google that question, you’ll see numbers of around $200,000 to $250,000.
Again, that’s not advice, but that’s the kind of ballpark that is relatively well known.
Learn how to get the most out of your SMSF FREE through my e-learning course at https://insp.red/smsfwebinar
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