Are you already in business and looking to take the next step to buy your own business premises? Or are you looking to start a new business and would like to purchase a place to run the business from Day 1? Should you buy the premises in your own name? In a family trust? Something else? Please read on to see our tips on how to purchase your business premises.
How is commercial property different?
Most are familiar with residential property as an investment, but how does commercial property compare? Commercial property has some unique qualities that mean you might buy it in a different legal entity to what you would buy a residential property as an investment.
Residential
- Shorter-term leases, usually 1-year
- Short vacancy periods
- Rental yields usually around 3% to 4%.
- Usually starts off negatively geared.
- Landlord pays for most costs.
Commercial
- Longer-term leases, usually minimum 3-years
- Longer vacancy periods (harder to replace tenants and more vulnerable to changes in the economy)
- Rental yields usually between 5% and 12%.
- Usually positively geared from the start
- Tenant pays for most costs e.g. council rates
With residential property people will often buy in their personal name to get the negative gearing tax benefits. But as you can see, this is usually not an advantage of commercial property. Therefore we need to look at the alternatives.
What are the options?
In practical terms, we have the following options available for which entity to purchase your own business premises in:
- Your name
- Your spouse’s name
- Company
- Family trust
- Self-managed super fund (SMSF)
So what are the advantages and disadvantages of each of these options?
You
- Pay tax at your marginal tax rate (up to 47%)
- No asset protection
Spouse
- If in lower tax bracket then will save some tax
- Might not be useful if running a business and splitting other income with spouse already
Company
- 30% tax rate, but only whilst money is left in company
- 25% small business tax rate doesn’t apply to company receiving only passive income
- If sell property in future, no 50% general CGT discount on capital gain
Family Trust
- Useful where a number of close family members (spouse, children who are 18+, retired parents not receiving Centrelink) that can be distributed to for tax purposes
- Final tax will depend on individual tax rate of each beneficiary (family member)
- Better asset protection than buying in personal or spouse names
Self Managed Super Fund (SMSF)
- Low tax rate of 15% which is great when you have a high yield, positively geared investment such as commercial property
- When SMSF is in pension mode the tax rate is only 0%
- Effectively the rent paid from your business to SMSF is a way to get extra tax-deductible contributions into super above the usual limits e.g. $27,500 per annum
- Great for asset protection (generally super funds cannot be accessed in bankruptcy)
- Downside is that profits are ‘stuck’ in super fund until age 65 in most cases
So, what is the best option?
Although it will depend on your personal circumstances, as a general rule:
- If you are happy to not have immediate access to the funds generated from the premises rent, a SMSF is likely your best option.
- If you want access to the cash flow from the property rent in the short or medium term, a family trust is likely your best option.
