Commercial tenants are certainly more fortunate than their residential counterparts when it comes to lease security, however sometimes nothing beats owning the building you operate your business from. In order to make an informed decision on whether or not to purchase a property, it is essential you consider the tax and cash consequences before you take the plunge.
Deciding whether to buy a property
Investing in commercial property can be a great move for your business if it’s being made for the right reasons. Ask yourself:
- Why you’re buying the property
- What you could do with the money if you didn’t purchase a property
- What your long term plans for the business are, and how owning property supports those plans
Make sure you’re happy with the answers to those questions before taking this idea any further.
Preparing to buy a property
Before buying anything you’ll want to sit down and prepare a budget to determine what you can afford. First off, you’ll need to allow for the deposit, which is commonly 30% for commercial property. After that you need to take into account:
- Legal fees, inspection fees, depreciation report fees, etc. in relation to the purchase
- Cost to renovate upon purchase (if required)
- Mortgage payments (interest, principal, fees, etc.)
- Strata rates (if applicable)
- Council and water rates
- Repairs and maintenance
It’s a good idea to make an adjustment to your existing business budget to allow for the change in outgoings – take out the rent you’re currently paying and put in the various costs associated with owning the space. Doing this on a month-by-month basis should allow you to foresee any possible cash flow dramas well in advance.
Before purchasing a property, you should speak with your accountant, and possibly your lawyer, to discuss the most sensible structure to hold the property. There’s a rule of thumb that says you don’t hold passive assets (such as commercial property) in the same entity that carries on an active business – this means you wouldn’t buy the property in the same company that operates your business. There are a few options you can explore here including a separate company, a trust or even a self-managed superannuation fund. Either way, be sure to get the right advice before signing any contracts.
Making the purchase
If you do decide to purchase a property, it’s a good idea to commission a depreciation report (also known as a quantity surveyors report). These reports detail the various fixed assets within the property so that you can claim a depreciation deduction each year as the value of these assets declines. These reports are put together by a qualified quantity surveyor and can yield significant tax deductions.
It’s also important to have a commercial lease agreement in place if the property is held in a separate entity from your business. Why? The business will be paying rent to this separate – but related – entity, to ensure no hassle with the Tax Office you will want all related-party transactions to be undertaken on a commercial footing.
This means getting a real estate agent to estimate the market rent and then putting this in a rental agreement and sticking it on file, just in case the tax man comes knocking.
Negative gearing is something that applies to commercial property in the same way it applies to residential property. If the running costs of the property (e.g. interest, rates, etc.) exceed the rental income being received then the property owner gets a tax deduction for the loss being made.
Just be aware that your ability to access this tax deduction will be affected by the structure you choose to hold the property.
This article is by no means a comprehensive guide, but should give you a starting point for determining whether or not you want to invest in commercial property. For comprehensive advice, contact your accountant.
Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.
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