Month: December 2023
Pros and Cons of purchasing and owning a Commercial Property in a Company or a Trust or a SMSF
Purchasing a commercial property in Australia can be done through various business entity types, including a company, a trust, and a self-managed superannuation fund (SMSF). Each comes with its own set of advantages and disadvantages. Which one would you choose? Your choice should depend on your specific financial goals and long-term plans, taxation considerations, and your level of risk tolerance.
A commercial property investment offers you a rental income opportunity and potential profit upon a future sale of your property. The tax paid on a commercial property investment will depend on the type of business structure you have used to purchase the property.
Tables outlining some of the pros and cons of each business entity type:
Individual
| PROs | CONs |
| No setup cost | No flexibility to distribute rental profit and capital gain. |
| Land Tax Threshold is available | No asset protection |
| Can use negative gearing to offset other personal income | |
| Negative gearing losses may be absorbed by the company and may be carried forward for their relevant property | |
| Potentially landholder duty exemption when transferring property into the SMSF |
Company
| PROs | CONs |
| Shareholder liability is limited to their investment in the company, providing personal asset protection | Company insolvency or litigation against the company could put the property at risk |
| Rental income is taxed at the lower company rate of 30% | There is a setup cost for the company |
| Capital gains are paid at a lower tax rate and a small business may be eligible for CGT concessions | Reporting and compliance of a company can be complex, costly, and time-consuming |
| Negative gearing losses may be absorbed by the company and may be carried forward for their relevant property | Negative gearing losses may not be used to offset any other entity’s income |
| Tax-deductible expenses may be claimed for the property | 50% general CGT discount is not available |
| Land Tax threshold is available for company | Transfer duty is payable when restricting property from trust to SMSF |
Trust
| PROs | CONs |
| Trusts can distribute rental income to beneficiaries, potentially reducing the overall tax liability through tax planning | Limited control by the trustee/s, where giving beneficiaries a say in the property decisions might lead to conflict |
| Assets held in a trust are afforded a level of protection (discretionary trust) from any creditors of beneficiaries | Trusts are required to be set up and then require ongoing administrative and compliance management |
| CGT concessions may be accessed for the property (held for at least 12 months) if they will be distributed to beneficiaries | Land tax threshold is not available |
| Tax-deductible expenses may be claimed for the property | Potential land tax surcharge and duty surcharge might apply if the trust Deed allows distribution to foreign person |
| Transfer duty is payable when restricting property from trust to SMSF |
SMSF
| PROs | CONs |
| Low tax rates on capital gains (10%) and on rental income (15%) where the property is held for at least 12 months, reducing to 0% tax rate on rental income in pension phase | Illiquidity of SMSF assets restricts access of funds until retirement age |
| CGT exemption applies in the pension phase | Limited diversification if only investing in a single commercial property |
| SMSF members have control and may elect to invest in commercial property | Strict regulations and compliance requirements and severe penalties for breaches |
| Commercial property offers potential value appreciation, increasing SMSF growth | Ongoing management, accounting and auditing costs can be high after what can be a lengthy set up |
| Property can be purchased using SMSF contributions with potential tax concessions |
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| Tax-deductible expenses may be claimed for the property |
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YML Group specialises in property investment and taxation and can help you make an informed decision with your financial objectives in mind. Consult us about a suitable business entity to make your first, or next, commercial property purchase.
How can YML help?
Talk to our YML Chartered Accountants Team today to see how YML Group can assist you with your commercial property. For more information, view our website and contact us on (02) 8383 4400 or by using our Contact Us page on our website.
Who is a Related Party in your SMSF and why should you know?
The Superannuation Industry (Supervision) Act 1993 makes provision for inherent conflict of interest that exists in most SMSFs due to trustees being members and vice versa. Financial dealings and transactions intended to help a fund grow can be limited by conflicts of interest, so it is important to identify all related parties in a SMSF.
Related party status is often unclear and where there is confusion, there is a risk of conflict of interest which can arise when a trustee or a related party receives some form of personal benefit that might conflict with the best interests of the SMSF.
Who is a related party?
Identifying a related party is not always straightforward, however SMSF fund members are obvious related parties. Less obvious are associates of a SMSF fund member and the following may be considered a related party:
- A family relative of a member – spouse or partner, grandparent, parent, brother, sister, uncle, aunt, nephew, niece, linear child or adopted child or grandchild of a member or member’s spouse (cousins are exempt)
- An employer of a member – a member’s employer who contributes to a SMSF for the benefit of the member, known as an employer-sponsor, they are often noted in a trust deed
- Business associates of a member – a company, an investment or any business in which a member or a member’s relative has a significant influence, or of which a member or a member’s relative has control
A company will be deemed to be controlled by a member where a company’s directors are obligated or accustomed to act under the instructions of the member and their associates, or if they have more than 50 per cent of voting rights.
- Any other associates of a SMSF – an individual or any entity that has a close relationship with a SMSF or is sufficiently influenced by its members, either individually or grouped
- Other trust funds – trustees of any trust controlled by a member
A member will be deemed to control a trust where a member and their associates have:
- a fixed entitlement of more than 50 per cent of the capital of a trust
- a fixed entitlement of more than 50 per cent of the income of a trust, and are:
- able or accustomed, either formally or informally, to direct a trust’s trustees to act in accordance with the member’s directions, or
- able to appoint or remove trustees from a trust
Precautions and Considerations
All SMSF transactions must be conducted on an arm’s length basis, meaning that the terms and conditions of a transaction should be the same as if parties were not related.
Certain transactions are prohibited between a SMSF and a related party, such as acquiring assets, lending money, and providing financial assistance.
Penalties – fines or disqualification of trustees – are given for non-compliance with the SIS Act 1993, so trustees must ensure that they remain abreast of Australian Taxation Office (ATO) regulatory requirements.
If you’re a trustee, YML Super Solutions is here to help you clear up any confusion about your SMSF’s related parties. We can also help you keep informed of the ATO’s SMSF rules and regulations, so you can manage your fund in the best interest of its members.
How can YML help?
Talk to our YML Super Solutions Team today to see how YML Group can assist you with your SMSF. For more information, view our website and contact us on (02) 8383 4444 or by using our Contact Us page on our website.
