Bricks & Mortar - January 2009
Our panel of experts answers property investment questions from API readers. For more Q&As, see this month’s API magazine.
A taxing prospect
Q: I am a 30-year-old single male. I live and rent a home in Sydney. I am unable to afford to purchase a home in the Sydney market so recently I purchased an investment property for $200,000 in Melton, Victoria. It was my aim to make a profit on this property after three to four years, sell the property and use the after tax profit to fund a principal place of residence purchase in Sydney. After reading October's article on renters, it is my understanding that because I don't own a home I will have to pay 50 per cent capital gains tax on the Melton investment when I sell. Is this correct? If so, how can I get around this problem, since a 50 per cent tax will greatly reduce any profit I will make on the sale.
A: If you have never lived in the Melton property then you will be subject to capital gains tax on the property when you sell it. Generally, the gain will be the difference between the selling price and the sum of the buying costs, purchase price (reduced by any building depreciation claimable) and the selling costs. This amount is then halved (providing you've held the property for longer than 12 months) and added to your taxable income to be taxed at your marginal rate. So the highest possible rate of tax applicable to your gain will be 23.25 per cent. If this property had been your home and you then moved out you could continue to cover it as your main residence for another six years while it was rented out. You can even move back in again and cover it for another six years. Unfortunately you can't do this retrospectively. Further, if you were to move into it now and live there for more than six months then you'll disqualify yourself from ever receiving the First Home Owner's Grant. If Melton was purchased after July 1, 2000 then the fact that you have never lived there means you will still qualify for the grant when you eventually buy a property to live in. Julia Hartman
First-time developer
Q: I am undertaking my first development project: a set of four townhouses in the mining town of Moranbah with my best mate who is a licenced builder as a partner. I used equity in my own home to purchase the land, we have development approval and the plans have been certified. We estimate it will cost $1.1 million for the construction and are looking for two pre-sales to obtain the finance before proceeding. We have spoken to third parties who have expressed interest in funding the project if necessary, but we are reluctant to go down that path in case we get to the end and find we can't sell for the prices we anticipated.
This is where we're at. Assuming we're successful with this project, how do we move on from here and progress to the next level?
What we're envisioning is along the lines of forming a property development company with a funds management division to raise capital for investment through investors/shareholders. I just don't quite know how to approach or go about this at the moment and was hoping you could shed some light on the matter.
I would greatly appreciate any information or advice on how to take the next step.
A: That's a two-barrel question. In regards to your project I assume you have approached a financier and that is why you require two pre-sales. I assume you have also come up short of equity to fund the construction. I don't know how short you are but at present financiers vary greatly with their funding LVRs (loan-to-value ratios). Some are out of the market or lending low. Others, like my primary financier, can lend up to 85 per cent of total development costs including capitalised interest. Firstly see if you can score a higher LVR lender. If you're still short you should consider your offer of investors funds as an equity top up secured by a second mortgage. Your two presales should give you the confidence in end values. It's also a test of your own confidence. You have to be confident in the outcome if you expect a financier or investors to be confident enough to finance your project.
In regards to going forward and establishing a development company be very careful you get the right legal advice before venturing into funds management or capital raising. This is a very highly regulated and litigious area under ASIC regulation and can be impacted by the Corporations Act and the Financial Services Reform Act. Advice in this area of law is beyond the scope of your average lawyer. You need to seek advice from a lawyer specialising in corporate law in the areas of capital raising and managed investment schemes. Bob Andersen
For more Q&As, see API magazine.
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Meet the panel
Julia Hartman, CPA, registered tax agent and founder of BAN TACS Accountants Pty Ltd, www.bantacs.com.au
Bob Andersen, senior partner, Positive Property Strategies, www.propertystrategies.net
