When purchasing commercial property, selecting the right legal structure is essential for not only optimising overall benefits and tax, but to also reduce any risks involved. Boutique Advisers assists business owners across Perth and Australia to make an informed decision when purchasing commercial property – here are some common legal structures to consider:
Individual Ownership
Individual ownership is the simplest form of property ownership, where the property is owned by a single person. This structure offers straightforward management and control but comes with significant risks. The owner’s personal assets are exposed to liability, and any legal issues related to the property can affect their personal finances. The property is also at risk if you get into financial or legal trouble personally.
Company
Forming a company to purchase commercial property provides significant liability protection. The property is owned by the company, and shareholders are not personally liable for the company’s debts. You also pay tax on any income generated from the property at the capped company tax rate, ranging from 25-30%.
However, one major drawback is that you won’t have access to the 50% capital gains discount on assets held for longer than 12 months – a provision generally available in other legal structures. Establishment and ongoing costs are also higher for a company.
Family Trust
A family trust is a legal arrangement where a trustee holds the property on behalf of the beneficiaries, typically family members. This structure offers asset protection and can be an effective way to manage and transfer wealth within a family. Additionally, Family trusts allow you to stream income to the most tax-effective beneficiaries.
Succession of ownership between family members is made easier in this structure, but Family Trusts can require careful management and compliance with trust laws. You’re also unable to benefit from a negatively geared arrangement.
Unit Trust
Unit Trusts allow multiple investors to pool their resources and share in the income and capital growth of the property. Each unitholder has a fixed interest in the investment, which can be bought and sold by various entities within a family group.
Unit trusts offer flexibility and can be an efficient way to manage investments, but they require a clear trust deed and compliance with trust regulations. You would also not benefit from a negatively geared arrangement under this structure.
Self-Managed Super Fund (SMSF)
An SMSF is a private superannuation fund that you manage yourself, which can be used to purchase commercial property. This structure offers significant tax advantages and allows for greater control over investment decisions made within the super environment.
However, SMSFs are subject to strict regulatory requirements and require careful management to ensure compliance with superannuation laws. There are limitations with how you modify the property and restrictions when borrowing to consider if deciding on an SMSF structure.
Conclusion
Choosing the best legal structure for your commercial property purchase depends on your specific goals, the overall purpose and plans for the property and a myriad of other areas like whether you finance the purchase and when you plan to sell, if at all.
Consulting with a Boutique Financial Adviser can help you determine the best structure for your investment, ensuring you maximise benefits and minimise risks. Happy investing!
