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Rental Property Business and Building Business in Partnership

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Newbie

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My de-facto partner and I have a registered Partnership, with agreed 60/40 split of profits or losses, operating for past 4 years.

 

To date the focus of the Partnership has been building work for clients.  My partner is a builder, we employ two apprentices, and I do all the bookwork, tax reporting and returns, payslips for apprentices, and some design work for our clients.

 

We have bought two lots of vacant land over the last two years, with the aim to build investment homes and rent them out.  The land is held as joint tenants (50/50 ownership), purchased with loans in joint names, and the money to build the houses will be from loans in joint names too.

 

This year we have enough equity saved to build these 2 houses, but will do some building work for clients (likely only 20% of year).  We have reviewed our situation and now want to sell one of the houses for profit, and keep one as a rental investment.

 

With the information I've read, I believe that both the rental and build-to-sell homes can be run through the partnership, and the profit distributed 40/60 as per partnership agreement.  Correct?

 

I already own two rental properties which i manage myself, both are in my name alone, so i have been putting income/loss for these two on my Individual Tax Return.  Although my partner is not legally an owner, he built both homes and we share all our money.  Can I bring these two existing rentals into the Partnership business? 

 

So thats the first question.

 

Second question is we have recently found another property which we settle the purchase of end of January - this property is already a rentable home, but we intend to renovate it to increase the rental yield, rent it out, and in the future add a second home on the property to rent out as well.  My intention was to buy it as joint tenants (50/50), but due to bank requirements, we probably need to put it in my partner's name alone.  If the property is legally his, can we still run the rental through the partnership or not?

 

The total will be 4 rental properties (two in my name) and one joint, one in partners name.  I will self-manage all, we have jointly funded the purchase and building/renovation of all.  Can i simplify things by running them all through the partnership, or do i need to run some through Individual Tax Returns?

 

Also, do you think that our activities constitute running a rental business, and if so, how does that impact our tax situation? 

If so, will i need to add that to our partnership agreement?

 

I'm confident of what can be claimed upfront, what needs deferring, what costs go towards calculating cost base for CGT etc. 

Except for one aspect, how to treat my partner's "wage" for building the property we intend to rent out, and the "wage" for building the build-to-sell home.

 

Take this simplified example:  the house we intend to hold longer term as a rental, cost for buying land is 200k, materials are 150k, wages for our apprentices working on its build is 25k, wages for my partners time working on it is $40k.  I want to include his market-rate "wage"for his time as part of the Cost Base for when we eventually sell this house.  But surely the partnership doesn't need to receive this 40k from ourselves, and declare as income on tax return?  Can we claim 40k in cost base without paying income tax on that 40k? Or do we leave it out of the Cost Base because we didn't "pay it"?

 

Second example: build-to-sell home. Same question for the 40k wages in Cost Base.  Also we are GST-registered, so intend to use the Margin Scheme to calculate GST payable on the sale, and will be claiming GST on outgoings to build property.  How do we manage my partner's "wage" in terms of GST requirements?

 

Thanks very much for any answers.

 

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Community Manager

Replies 1

Hi @unicorn,

 

Thanks for your patience.

 

Firstly you need to established whether you and your husband are carrying on a business jointly as a partnership.

 

There is an example in TR94-8 in paragraph 32 and the result is listed in paragraph 33. The example could provide some useful information to match against your circumstances.

 

If you consider that you can apply this approach to your circumstances then you and your husband will be carrying on a business in partnership.

 

First question- Assuming that the answer above is yes, given the nature of your business, you would not be able to “bring the two existing rentals” into the Partnership business and split the rent and deductions 60-40. Where you are sole owner of a property you would continue to declare this income and claim deductions as rental income for your income tax return.

 

Where you and your husband are joint owners of a rental property you each declare 50% of income and claim 50% of expenses as rental property income and deductions.

 

Generally, the ATO treats the legal owner or owners of rental properties as deriving their share of income and claiming deductions according to their legal interests in the property. If held as joint tenants, then income and deduction is split 50/50.

 

Second question - As per above, if the property is registered in the name of the husband then he declares all of the income and claims all of the deductions.

 

Question 3- It seems unlikely on the facts presented that you are carrying on a business of renting properties, and the issue is only relevant where properties are held in joint names. See example 4 from Co ownership of rental property and the explanation above it explaining the splitting of interest deductions between co-owners and partnerships.

 

Question 4 – Partner Wage
When the partnership builds a house and registers it as a jointly held rental property by the individual partners it ceases to be a partnership asset. The partners as owners ‘inherit’ the cost of the partnership for CGT purposes of the rental property. The costs for the partnership are actual costs incurred and do not include the value of services provided by your husband as a partner. This means that the ‘40k’ does not form part of the cost base for you and your partner as joint owners of a rental property.

 

KylieS

 

3 REPLIES 3
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Community Manager

Replies 0

Hi @unicorn,

 

Thanks for your questions.

 

Partnership assets may be acquired directly by the partnership or brought into the partnership by one or more of the business partners. There would need to be a transfer of title to the partnership to show that it is a partnership asset. 

 

We will need to research the rest of your question and get back to you.

 

Thanks

 

KylieS

 

 

Highlighted

Best answer

Community Manager

Replies 1

Hi @unicorn,

 

Thanks for your patience.

 

Firstly you need to established whether you and your husband are carrying on a business jointly as a partnership.

 

There is an example in TR94-8 in paragraph 32 and the result is listed in paragraph 33. The example could provide some useful information to match against your circumstances.

 

If you consider that you can apply this approach to your circumstances then you and your husband will be carrying on a business in partnership.

 

First question- Assuming that the answer above is yes, given the nature of your business, you would not be able to “bring the two existing rentals” into the Partnership business and split the rent and deductions 60-40. Where you are sole owner of a property you would continue to declare this income and claim deductions as rental income for your income tax return.

 

Where you and your husband are joint owners of a rental property you each declare 50% of income and claim 50% of expenses as rental property income and deductions.

 

Generally, the ATO treats the legal owner or owners of rental properties as deriving their share of income and claiming deductions according to their legal interests in the property. If held as joint tenants, then income and deduction is split 50/50.

 

Second question - As per above, if the property is registered in the name of the husband then he declares all of the income and claims all of the deductions.

 

Question 3- It seems unlikely on the facts presented that you are carrying on a business of renting properties, and the issue is only relevant where properties are held in joint names. See example 4 from Co ownership of rental property and the explanation above it explaining the splitting of interest deductions between co-owners and partnerships.

 

Question 4 – Partner Wage
When the partnership builds a house and registers it as a jointly held rental property by the individual partners it ceases to be a partnership asset. The partners as owners ‘inherit’ the cost of the partnership for CGT purposes of the rental property. The costs for the partnership are actual costs incurred and do not include the value of services provided by your husband as a partner. This means that the ‘40k’ does not form part of the cost base for you and your partner as joint owners of a rental property.

 

KylieS

 

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Newbie

Replies 0

Dear KylieS

 

Thanks so much for your comprehensive answer.  Feel on the right track now.