Purchasing a dental practice premises is a significant investment into your financial future.
Getting it right from the beginning can be crucial in not only limiting your risk but also reducing your future tax implications. Which entity you purchase your dental practice premises in is pivotal and can be sometimes overlooked by dental professionals when considering how to purchase.
Just as important of course, is once this is determined, is how to finance this investment, what key considerations need to be made when financing? While there is no one-size-fits-all solution when it comes to purchasing your practice premises, there are many factors to be considered when it comes to structuring and finance.
Structuring: An Individual (Dental Practitioner)
Buying in an individual name can sound the most appealing; least expensive and complex to set up, likely access to Capital Gains Tax (CGT) discounts and land tax threshold benefits. However, this may not necessarily be the case.
Buying in the dental practitioner’s name offers no asset protection. Despite holding insurances being a potential safeguard, dental practitioners should err on the side of caution when looking at holding assets in their own name.
A Company
A company can be a good vehicle for premises acquisition as access to the corporate tax rate of 30% can aid debt reduction (less tax leakage). Furthermore, holding assets via a company can provide a layer of asset protection (when owned by a discretionary trust) not afforded if holding the premises in your personal name.
Companies do have access to the land tax threshold and a 30% tax rate. Unfortunately, companies do not have access to the 50% CGT discount, however, they may be eligible to access business CGT concessions (subject to eligibility criteria).
A Discretionary Trust
Another option is a discretionary trust structure. Trusts generally offer an effective form of asset protection as beneficiaries generally do not have a defined interest in the assets. Another benefit of discretionary trusts is that they provide flexibility in the distribution of income. Ordinarily a discretionary trust is not eligible for a land tax threshold as it is a ‘special trust’.
This means additional land tax can be levied on a property held by a trust. An alternate option may be a unit trust. Unlike discretionary trusts, unit trusts are typically eligible for the land tax threshold.
A unit trust primarily differs to a discretionary trust as the beneficiaries and their interests are explicitly identified in the trust deed according to the proportion of ‘units’ they hold as a percentage of total issued units. This also creates a defined interest in the trust and does not assist with asset protection.
A trusts capital gain can be distributed to its beneficiaries who can access the 50% capital gains tax discount. Again, like companies, if a trust can further satisfy the additional basic conditions, they may be eligible for small business CGT concessions.
SMSF
A Self-Managed Super Fund (SMSF) can be a tax-effective vehicle for acquiring your dental practice premises. Under the right circumstances and when executed correctly, this can be an efficient investment vehicle.
With a low tax rate of 15% (when in accumulation phase), or tax free to certain limits (when in pension phase) a SMSF certainly provides a concessional tax environment. A SMSF can also access a one third or 33% discount on any capital gain made on the sale of an asset held for at least 12 months.
However, as the rules and restrictions for purchasing property under the superannuation legislation are complex, caution must be exercised, and advice obtained before buying your premises in an SMSF. It is important to select the appropriate structure for your specific circumstances as well as understanding the income tax consequences and ability to provide asset protection prior to making any significant investment decisions.
What about finance?
Making sure you can access the most appropriate finance for your new practice can be one of the biggest hurdles you will need to face.
The use of limited private fee income
If you are considering commencement in private practice or private billings have only recently become your primary source of remuneration, a small number of banks can accept projected income or limited private fee income to provide adequate borrowing capacity.
A projection based on future billings and your experience in your field of specialisation can be acceptable to some lenders and if already in private practice, as little as one quarter of private patient income (net of service fees and expenses) can be annualised to maximise your ability to borrow.
Finance Broker
An experienced broker is a powerful resource when looking at purchasing your practice premises. Brokers with dental specific funding expertise and established relationships with banks are an important piece of the puzzle.
A good broker will understand the career and income progression of dental practitioners which can provide superior outcomes to using a broker or banker with limited dental funding experience. Depending on the type of funding required, your broker should know the best banking teams to work with for your situation. The best bank for a home loan is not necessarily the best bank for practice related funding.
Always ask an expert
Your accountant should be your first point of contact and will have the best understanding of your financial position and what may be achievable. Advice on appropriate entities to be established, debt structuring and analysis of future cashflow and taxation will be a small part of the guidance you will receive. The transition to private practice and the potential finance requirements can initially appear a daunting process.
Seek out your accountant’s input and advice at the earliest possible time.
