Business owners and professionals are making the most of record low interest rates, rising prices and opportunities to grow capital by buying their work premises rather than paying rent.
Many will have benefited from the significant property value increases over the last few years as the market has become somewhat of an investment ‘New Black’.
A critical consideration is what entity should you put the property purchase in. The answer will depend on each person’s particular circumstances, their level of sophistication and whether it will fit in with the overall structures already in place.
There are three main ways you can execute the purchase.
1. Personal ownership
This is the simplest way to purchase a building. There are no fees to set up or maintain a separate legal structure.
From an asset protection point of view, it is generally best avoided unless the risk of personal litigation is very low. If you are in a trade or profession where you could be sued, the property will be at risk.
Any rental income is included in assessable income and taxed at the owner’s personal marginal rates, allowing negative gearing losses on your property to be offset against other income.
If the property is sold for more than it cost, a 50 per cent capital gains tax discount is available so long as the property has been owned for at least 12 months.
2. Trusts
Trusts are simple to establish with manageable ongoing legal and administrative costs. They also provide better protection against legal actions because the building may be able to be quarantined from third party legal claims relating to personal or other business activities.
A trust also gives you the flexibility to distribute the rental income earned across different beneficiaries, such as your family who may be on the lowest marginal tax rate and capital gains can be streamed to beneficiaries who will most benefit.
State imposed land tax could be higher as there is no tax-free threshold.
Losses from negative gearing are retained within the trust unless it has other income to offset the loss. The tax loss can be carried forward indefinitely and recouped only if certain trust loss recoupment tests are satisfied.
3. Self-Managed Super funds
SMSFs are highly regulated and the members need to be careful they are purchasing an asset that complies with the scheme’s deed and investment strategy.
Funding is by cash where available or what’s knows as a limited recourse borrowing arrangement.
The property inside the SMSF is tax-advantaged. Rent must be paid by the business at market rates, but the business will obtain a tax deduction, at 45 per cent for individuals, while the SMSF will pay tax of only 15 per cent on the rent.
If the property is sold, capital gains tax is also only 15 per cent, which is reduced by one-third to 10 per cent if the property has been owned for more than 12 months. There is no tax on earnings or capital gains if the fund is providing a pension.
This is a general overview of the options and of course it is important to seek professional advice to fully understand the complexities and to decide whether property purchase is right for your personal circumstances.