Purchasing a business 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 business premises in is pivotal and can be sometimes overlooked by 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 premises, there are many factors to be considered when it comes to structuring and finance.
Structuring: An Individual
Buying in an individual name can sound the most appealing, least expensive and simple to set up, with likely access to capital gains tax (CGT) discounts and land tax threshold benefits. However, this may not necessarily be the case.
Buying in the business owner’s name offers no asset protection. Despite holding insurances being a potential safeguard, business owners should err on the side of caution when looking at holding assets in their own name.
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 small business CGT tax concessions (subject to eligibility criteria).
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, the trustee does.
Another benefit of discretionary trusts is that they provide flexibility in the distribution of income.
Ordinarily a discretionary trust is not eligible for the 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 issues units. This also creates a defined interest in 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 if eligible. 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 business premises. Under the right circumstances and executed correctly, this can be an efficient investment vehicle.
With a low tax rate of 15% (when in accumulation phase), or tax free (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 premises can be one of the biggest hurdles you will need to face.
Finance Broker
An experienced broker is a powerful resource when looking at purchasing your business premises.
Brokers with commercial property expertise and established relationships with banks are an important piece of the puzzle. Depending on the type of funding required, your broker should know the best banking teams to work with for your situation.
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. Seek out your accountants’ input and advice at the earliest possible time.
