Structuring for development
Question from Clifford updated on 20th July 2020:
I have an existing limited liability company (LLC) and a family Trust. All five of the properties I own are in the Trust. The LLC runs a driver training business and now a property management business. The LLC is not GST registered as it is below the threshold.
Now I plan to expand my business by adding a few services like project management and developing and trading properties through the LLC. By doing so, I will have to get this LLC GST registered. Am I correct?
I’m about to embark on constructing a new property for the family Trust (client). The LLC will be charging/invoicing the family Trust for the materials and services in constructing the property. The LLC will then claim the GST for the services and purchases of materials.
Is there any problem or conflict of interest with this structure? Should I form a separate LLC to run the project management and property trading?
Our expert Mark Withers responded:
Yes, the company will need to be GST registered as it will be conducting a continuous and regular taxable activity of more than $60,000 turnover. The company can claim GST on materials it buys to supply to the trust but must, of course, charge GST to the Trust that the Trust won't be able to recover, so it’s a net / net situation on GST for the company. But there is no issue with doing that.
The alternative is that the Trust just buys it materials direct from the supplier. There is no real tax advantage in separating the activities the company is undertaking but there may be a commercial reason. Property development is risky. If you experienced a failed development that rendered the company insolvent this would place at risk the other business that it operates. This would be avoided if separate companies were used.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
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