As a business owner, securing a prime commercial location can be an essential component in the success of a business – especially for those operating in high-traffic industries. Many business owners often commence their journey leasing a premises, however following successful start-up and continued expansion, consideration can turn to the purchase of a commercial premises and how best to do so.
In considering the purchase of a commercial premises, it is important to understand the entity structures which best match your individual circumstances, business, and the tax classifications/on-going obligations.
We have highlighted the various ways to purchase your businesses’ property as well as the tax compliance requirements.
Considerations
It is important to highlight that whilst you may already be tenanted in the premises you wish to purchase and have an existing familiarity, completing a through due diligence on the property is still a needed requirement.
There are a few searches and enquiries (including legal, physical and financial) which should be carried out when completing the due diligence in purchasing a commercial premises. These include rates and water search, title search, company search, a search for contaminated land registered, and land tax search.
Ways to Purchase your business property?
Under Private / Personal Ownership
In purchasing a commercial property under private ownership, you do so in your own name. As a result, loan processes to secure finances are relatively straight-forward. Likewise, the level of on-going fees is less in comparison to other structure set-ups.
However, in purchasing privately, financial and legal protections are limited – with the property at risk where the individual business owner faces personal litigation.
From a tax perspective, concessions are available, with the profitable sale of the premises in the future eligible for a 50% Capital Gains Tax discount.
Company Structure
When considering purchasing your businesses’ commercial premises, doing so via the company structure may be a viable option for owners. Under a company structure, the set-up offers greater legal and financial protections alongside certain tax benefits.
Company structures are not eligible for the general 50% CGT discount (unlike individuals & trusts), however the property purchase may be eligible for Small Business CGT Concessions, where the company structure meets required conditions.
A company structure attracts a flat rate of tax that can be potentially lower than an individual’s marginal rate of tax, where the property is making a profit. If the property is negatively geared than the losses are quarantined inside the Company until profits are made.
Cashflow can be retained by the company to pay down borrowings if applicable.
It is important to note that a company structure has a cost to establish and then annual reporting obligations. Whilst there is a higher level of commercial protection in place under the structure, the property may still be at risk where the company faces legal proceedings or becomes insolvent.
Trust Structure
Purchasing via a Trust structure can have several benefits that owners can utilise. One of the biggest can include greater asset protection under the trust structure. Often business premises are purchased in an entity other than the entity that operates the business for asset protection purposes.
The purchase of the premises in a trust can access the 50% Capital Gains Tax discount on disposal of the property.
Similarly, purchasing the property in a trust can allow the premises to be passed on to family without the need to market and sell (benefitting estate planning and business continuity). In this circumstance, the trust continues to hold the property and the income can be distributed to family members, as allowed under the Trust Deed.
Trusts are required to distribute all its profits each year, so cashflow needs to be managed if borrowings are involved.
If the property is negatively geared, then the losses stay inside the Trust until they can be offset by future profits.
Self-Managed Super Fund
In purchasing a commercial property through a Self-Managed Super Fund, an important requirement pertains to the need for the property to be rented by the company at a market equivalent commercial rate (with a corresponding lease agreement and relevant documentation).
With this, a benefit in doing so surrounds any rental income of the SMSF being taxed at 15%, compared to company and individual tax rates (i.e. 30% for company and 47.5% top marginal tax bracket for an individual). Likewise, the SMSF is eligible to a CGT discount.
Where the property is sold following the business owners’ retirement, there may not be a CGT payable on the sale where the owner is drawing a pension from the Super Fund.
Conversely, where purchasing the commercial property through the SMSF, there are a number of compliance costs associated with operating the Fund – including audit fees and valuations. Under the entity, SMSFs must also report the property at market value each year – whereas this is not necessary through alternative entity structures.
Furthermore, bank finance to purchase the property may also come with further requirements and costings (such as the inclusion of a Limited Resource Borrowing Arrangement).
For More Information
For more information on how best to purchase your company's commercial premises or to answer any questions you may have, please contact the Archer Gowland Redshaw office on (07) 3002 2699 | info@agredshaw.com.au.
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