Renovating structure

Dec 16, 2012

Reader 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 and sell 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?

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.

 

This article first appeared in the December 2011 issue of Your Investment Property Magazine  www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2011.

Tags: CGTCompany taxDeductionsFamilyPersonal taxProperty

Author: Mr Taxman

Comments

Post a New Comment

comments-rhsLatest Comments

  • "Great insights on tax-saving strategies! Planning ahead before June 30 is crucial for maximizing returns. Thanks for the valuable tips!"

    By: SavePlus UAE at Feb 13, 2025 3:05PM

    Post: Tax-saving strategies to get in place before June 30

  • "Hi, I’m wanting some advice on setting up my new Personal Training business and the need to purchase a car that’s reliable and able to carry all my equipment. Can I claim the cost I pay for the car..."

    By: Kate Miller at Nov 22, 2023 10:30AM

    Post: Claiming car expenses

  • "Hello Mr Taxman. I am an American and live in America. I have a Forex trading account with Trade Nation in Australia. I have done well and made some profits. The total account is 42k with around 27k..."

    By: Bill at Oct 09, 2023 8:54PM

    Post: Foreign currency trading

  • "Hi, I work from home however I'm occasionally asked to go to my employer's home and work from her house. Can I claim this travel? "

    By: Erin at Aug 01, 2023 9:51AM

    Post: Claiming car expenses

  • "Hi, What is the protocol for claiming tax on my personal trailer which is used by my work for all general maintenance work on a full time basis. Thanks Lee."

    By: Les Wilkinson at Jul 09, 2023 5:35AM

    Post: Claiming car expenses