Question: I’m planning to move into the renovate to sell strategy, and was wondering what structure I should use to make the purchases (company, family, individual, etc.). Are there CGT savings that I can make by using a company structure, for example, as opposed to doing the reno as an individual? I’m also aware that reno to sell is higher risk than buy and hold, so is there a structure I can use that provides me with more protection than buying as an individual?
Answer: There are a number of factors to consider when determining what structure to own an asset in and they usually revolve around capital gains tax (CGT), liability and cost.
As your intention is to renovate and sell a property for a profit, rather than maintain the property as a long-term income producing investment, you will not be entitled to any 50% CGT discount concession and instead be taxed on the entire gain as a "profit-making scheme".
A company (with “Pty Ltd” at the end of the business name) is a common business structure for operating entities, particularly where CGT concessions do not apply. Any profits are taxed at a flat 30% which can be rather attractive to those individuals who are taxed at a minimum of 38.5% once their income exceeds $80,000.
Unlike sole traders and partnerships, companies have limited liability, although personal guarantees may be required by directors from time to time, particularly for loans to buy property which may negate some of its effectiveness. The downside to having a company is that they do cost a few thousand dollars to establish and run each year. They also don’t enjoy land tax thresholds that individuals receive.
If you don’t want the hassle of setting up a company, and have a spouse, then it might be worthwhile buying the property in partnership as you share the gains and can both take advantage of the lower tax thresholds. It may also be more beneficial for the lower earning spouse to hold the majority (or all) of the asset.
Definitely consider selling the property in a financial year when your income will be lower and you fall into a lower marginal tax bracket. This is particularly relevant when investors are nearing retirement as they should consider delaying any tax liability until they have retired and earn little or no income.
Please note that if you elect to move into your new property and renovate at the same time, it is potentially possible to receive the principal place of residence exemption and avoid CGT altogether. But this comes with a word of caution as the Australian Taxation Office (ATO) will clearly frown if you try to do this more than once as they will see you operating a business with the intention to make profits.
- Answer provided by Adrian Raftery (mrtaxman.com.au)
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