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Should I Rent or Own my Business Premises?

11 years ago

Accounting Advice, Business, Self Managed Super

Making the decision whether to rent or buy your business premises is one of the most significant financial decisions you can make as a business owner. It’s important to make this a well informed decision and we always advise you contact your accountant first.

What are the advantages to Leasing?

Generally leasing is not a long-term financial commitment, but your lease period locks you in to the rental payments until the lease’s expiry. A shorter term lease may be advisable for new businesses until they are established. Financial losses may be minimised where a tenant is able to sublet should the business shut down. If a business requires new premises to enable either a downsize or expansion, then on expiry of the lease the business is able to respond to market conditions by relocating to a more appropriate location. It is important to seek legal advice before negotiating or signing a lease, and to carefully consider the terms and conditions in the lease. Owners may be in a position to invest elsewhere in the business while they are leasing.

Pros & Cons of Owning

Owning a building requires a large capital injection and may incur land tax obligations, building insurance, maintenance and repairs. However when property prices rise, real estate can provide valuable capital growth. Buying business premises also provides security and freedom which may not be available under a lease. You may be able to lease a portion of the premises to another business and generate an alternate income stream if you have sufficient space. This space may be utilised later on if your own business requires room to expand. It is critical to have the building inspected prior to purchase to know what potential problems you are inheriting.

Purchasing Through a SMSF

Business real property used exclusively in a business IS classified as ‘business real property’ and can be purchased from related parties by a SMSF. The existing mortgage must first be discharged, and a new gearing arrangement set up through a limited recourse borrowing arrangement using a bare trust. The transaction must be at arm’s-length and an independent valuation is used to determine purchase price. The lease payments made by the business are held to be investment earnings of the SMSF and taxed at 15%. A solicitor should be used to draw up a lease agreement including an outline of the consequences should the rent not be paid on time. The lease payments should be reviewed regularly to stay at market rates.

Contact us if you would like advice on the best strategy for you.

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by Carol Allan

Carol is a Senior Accountant at Insight Accounting advice. She is a registered tax agent, has a Bachelor of Commerce and Advanced Diploma in Accounting. Carol’s areas of expertise include tax and property advice.