If you are reading this chances are you are thinking of buying an accommodation business or you already operate one. For the purposes of what I am going to talk about in this article let’s confine our thoughts to freehold and leasehold motels and caravan parks. The object here is to contemplate the various strategies that are worth thinking about as part of the purchase process.
Let’s start with the most common transaction we see and that is the purchase of a leasehold. By far the majority of our clients use a company acting as trustee for a discretionary trust. They do this for a number of reasons. The first and in my view most compelling reason is that using a trust opens up a range of options that can assist in reducing your tax burden. Secondly, acquiring the going concern asset in a legal entity other than that which may already hold assets can provide a level of asset protection should you ever be involved in litigation as a result of the operation of the business. There is a widely held belief that setting up a company and trust is time consuming and expensive. This was certainly the case many years ago but modern technology and market demand has made the process simple, timely and inexpensive. One last thought on leaseholds. If you are thinking that down the track you may wish to buy the freehold talk to us about your plans. Best to plan now for future events and ensure your finance structure is appropriate and you are with the right bank.
We now move on to the freehold going concern and things can potentially get a bit more interesting from here. You could simply duplicate the purchase entity structure outlined above and acquire the freehold going concern in a single entity. Certainly many purchasers do just this. However, there are other options. Just as a leasehold owner pays rent to a landlord the freehold going concern purchaser could choose to split the purchase between two contracts thereby creating a leasehold business and freehold passive investment. Why bother you may ask? One of the opportunities that is presented to a freehold going concern buyer is the option to sell off the lease later and retain the freehold as a rental income producing passive investment. Depending on the circumstances of the buyer it may prove advantageous to create the leasehold from the outset albeit a lease can certainly be created and sold at a later date. The other less well understood reason to split the freehold and leasehold from the outset is the potential to use a SMSF to acquire the freehold. Under specific regulated circumstances a SMSF can hold a passive arms length asset and it can borrow for that asset. So, provided your super fund is holding sufficient liquid investment funds it could potentially use those funds as a deposit and borrow the balance to acquire the freehold investment. A separate entity controlled by you would purchase the leasehold and rent the premises from the super fund. Happily, the rent being paid to the super fund is taxed at a concessional rate (subject to certain contribution limits) so this can, in the right circumstances, be an appropriate strategy both from a wealth building and a tax planning viewpoint.
Lastly we have the freehold passive investment purchase. Strategies around asset protection still apply albeit perhaps not at the same risk level as a hands on operator. Purchasers should however think about purchase entities, tax strategies and the use of a SMSF as part of the overall purchase feasibility assessment.
A couple of final thoughts. If you are a Leasee looking to buy your freehold talk to us first. Best to get the numbers and structure right before getting too excited. If you are a new buyer don’t forget that you can use equity in existing property assets to help make the deal work. In this circumstance tax planning and the right loan structure are imperative. Again, we can help and it costs you nothing.
Important Note: I am not a tax accountant or lawyer. The content of this article reflects the circumstances of many of our clients after they have sought professional accounting, tax planning and legal advice. No reliance should be placed on this content. Seek independent professional advice in all circumstances. In particular comments relating to SMSF strategies reflect our observations relating to client transactions that have been the subject of rigorous professional review and advice. Seek specialist SMSF advice before making any decision. None of this content constitutes a recommendation of any sort.
Mike Phipps
Director | Mike Phipps Finance.