Opinions on my situation

[see_change]

Are there two empty shells in your area , one for rent and one for sale or are they the same ?

If not, can you make an offer to buy the one for rent if it is more suitable ?

For elderly , frail , 6.5 km is a long way especially if there is an alternative in the same premises .

Could you make an offer to rent your current premesis under another name ......

Cliff

 

[Terry_w]

I think that many professionals - medical, legal, accountants - will set up smsf to buy their commercial premises / office and they rent these premises from their smsf. This cannot be done for residential as it is in breach of SIS act - I have obtained advice from my accountant - and have also personally seen this done.

With regards to the financing - lets say 800k property:

I am allowed to make 25k concessional contribution and 450k non-concessional contribution into super. I also will release 150k from first state super.

This allows 620k deposit from smsf. I will then need to lend the remaining 180k from somewhere. My accountant says that either I lend from bank or lend from myself.

They say that they recommend the latter situation as I will avoid bank fees/bank delays and they will draw up agreement with regards to interest payments?

I hope this sounds above board?

The other option that has crossed my mind that may be more simple is that I take out a loan to buy the 800k commercial premise in my own name (deposit secured against ppor and the balance secured against commercial premise) and then just pay interest on this loan and this may well be a simpler structure with easy arrangements for tax deductibility - but few professionals seem to do this. This was the structure I had in my mind for personal investment in IP prior to this situation arising.

I am not saying you cannot do it, but am a bit worried at how you were going to do it. But we are only getting part of the information here. I wonder if your accountant is up to it.

There are some serious tax and SIS Act things to consider so tread carefully.

THink of these
1. Borrow 80% now in the SMSF and park your money in the offset.
This way you will pay a bit in fees, but the SMSF will still have all the cash available if you want to invest in something else later. Same interest savings can be acheived as you will only be paying on a small portion.

or

2. Consider a structure outside of super. Unit trust may be worth looking at as the units can be sold to a SMSF at a later date and there are many tax strategies available.

But you also have to consider asset protection strategies. Buying in your own name will result in none. Using an appropriate structure and carefully planning how to to operate and run the structure you can achieve good asset protection which will strengthen over time.

 

[Terry_w]

This is as I suspected and hence, I wonder whether the following scenario is better for me in term so of buying my office premise.

Borrow from the bank in the traditional way to buy the office, which I will use myself. This means that I will not have to pay any rent and just pay interest to the bank which is fully tax deductible. I can also put spare cash in offset which means minimal interest charges.

Is the above scenario not a far simpler structure and avoids ongoing smsf fees / paperwork?

It also avoids the complexity of setting up the smsf loans structure and contributions debacle.

If I put in 450k in non-concessional contributions, does this not mean that I immediately have to pay super tax (15%) on this when this 450k has already been taxed?

I am not expecting capital gains on this office property and hence the smsf benefit of minimising CGT does not really apply.

Also if I pay the smsf rent, the smsf has to pay 15% tax whereas in the scenario above, I do not have to pay any rent at all.

Absolutely would be much simpler - but no tax advantages and no asset protection.

Consider though you could transfer the property to a SMSF at a later date as it is 'business real property'. Stamp duty exemption could also apply in NSW - but you would be up for CGT however if there is no growth then this won't be an issue (and have to consider is this a good investment if no growth, though I note you mainly want stability).

 

[Terry_w]

Sounds like you are willing to give up the SMSF option as your accountant will make some fees out of it??

Consider this.

You earn $500,000 pa. Then rent on your office is $100,000 pa.
This is deductible to you as a business expense.

So your taxable income would become $400,000
Tax saved = $47,000

1. SMSF
You pay your SMSF $100,000 in rent. Get a $47,000 tax saving.
SMSF pays 15% tax on this income from rent = $15,000
Net tax saving = $32,000 pa

2. Yourself
You cannot rent from yourself so no tax savings

3. Another entity such as a trust
You get a $47,000 tax saving, but
Trust gets $100,000 in income. This must be distributed to someone who will then pay tax on it. If it comes back to you then no tax saving. If the trust distributes it to a bucket company, then you could cap the tax at 30% so $30,000 tax.
The net tax saving is $17,000 pa.

(very simplistic!)

 

[china]

Are there two empty shells in your area , one for rent and one for sale or are they the same ?

If not, can you make an offer to buy the one for rent if it is more suitable ?

For elderly , frail , 6.5 km is a long way especially if there is an alternative in the same premises .

Could you make an offer to rent your current premesis under another name ......

Cliff

There is one empty shell in my area that is suitable - it is for sale and rent but needs 150k fitout and zoning approval. I don't think that three months is enough to do it all.

I have been asked to leave my current premises and no negotiations will be entertained by my current landlord.

 

[china]

Sounds like you are willing to give up the SMSF option as your accountant will make some fees out of it??

Consider this.

You earn $500,000 pa. Then rent on your office is $100,000 pa.
This is deductible to you as a business expense.

So your taxable income would become $400,000
Tax saved = $47,000

1. SMSF
You pay your SMSF $100,000 in rent. Get a $47,000 tax saving.
SMSF pays 15% tax on this income from rent = $15,000
Net tax saving = $32,000 pa

2. Yourself
You cannot rent from yourself so no tax savings

3. Another entity such as a trust
You get a $47,000 tax saving, but
Trust gets $100,000 in income. This must be distributed to someone who will then pay tax on it. If it comes back to you then no tax saving. If the trust distributes it to a bucket company, then you could cap the tax at 30% so $30,000 tax.
The net tax saving is $17,000 pa.

(very simplistic!)

Thank you for the analysis of the options. I must say that the trust option has never been put to me, possibly because I have no one to distribute it to.

With option two, whilst there are no tax savings, I think it would be correct to say that because I do not pay the 100k rent, even without the tax savings, I would overall have more cash in hand right now? With the least complexity and the least accounting / legal costs?

 

[Terry_w]

Thank you for the analysis of the options. I must say that the trust option has never been put to me, possibly because I have no one to distribute it to.

With option two, whilst there are no tax savings, I think it would be correct to say that because I do not pay the 100k rent, even without the tax savings, I would overall have more cash in hand right now? With the least complexity and the least accounting / legal costs?

The tax advantages come from utilsing 2 different tax payers. So nothing to play with if one your own.

But if you are in a high risk business then you have to think about asset protection foremost. 2 main risks broadly with this business = contractual and negligence.

I know a few GPs and specialists and they are very concerned about asset protection

 

[china]

Absolutely would be much simpler - but no tax advantages and no asset protection.

Consider though you could transfer the property to a SMSF at a later date as it is 'business real property'. Stamp duty exemption could also apply in NSW - but you would be up for CGT however if there is no growth then this won't be an issue (and have to consider is this a good investment if no growth, though I note you mainly want stability).

Thats very true, the business office that I intend to buy is really for stability and peace of mind in having a secure premise to conduct business. I don't expect capital gain and there may be no rental return if I leave and hence, may negate some of the proposed key benefits of smsf as landlord.

I suspect that the smsf is best used to buy assets that have appreciation potential and rental return over time.

 

[geoffw]

So if I vacate the premises and the smsf receives no rent and no capital gains, then there would still be ongoing costs with smsf. I suspect that my accountant would have a much bigger vested interest in smsf situation.

You seem to be saying that you won't be paying tax on a property your SMSF owns. If the property is in the SMSF, then I suspect that you would have to pay rent at commercial rates.

But, as has been pointed out, that savse a lot of tax. Why wouldn't you do it?

 

[MTR]

There is one empty shell in my area that is suitable - it is for sale and rent but needs 150k fitout and zoning approval. I don't think that three months is enough to do it all.

I have been asked to leave my current premises and no negotiations will be entertained by my current landlord.

If you need more time I would still go back to landlord and negotiate, you need to provide a sweetener, it will be far more cost effective in the end, rather than moving twice or making a poor choice due to time constraints, not to mention further disruption to your business.

 

[china]

You seem to be saying that you won't be paying tax on a property your SMSF owns. If the property is in the SMSF, then I suspect that you would have to pay rent at commercial rates.

But, as has been pointed out, that savse a lot of tax. Why wouldn't you do it?

No what I am saying is that if I vacate the premises which the SMSF owns and it is lying there vacant, then I have lost one of the key benefits of smsf, which is paying 15% tax on rental income received. Vacancy means no rent at all.

 

[see_change]

Will your business be worse of if you move 6.5 km or if you have a few weeks off to get everything in order closer to you current locality . Without out knowing specifics , I'd guess the later .

What happens when you take holidays or get sick ?

I'm assuming your clients world doesn't stop.

As a GP I found it was better if I just closed down when I had holidays . My patients all came back .

If you are going to move locally and open in a couple of weeks time , this is a great opportunity to do a mail out to all of you customers telling them of your hours . You can also use it as an opportunity to do a letter drop to the surrounding suburbs . This is legal as a doctor and I'm assuming for you as well.

In Terms of clarification of zoning , council should be able to give a good indication very quickly. You can always make the purchase subject to council approval.

If a commercial place is for sale and rent , it might be more negotiable . How long has it been for rent / sale .

Cliff

 

[china]

If you need more time I would still go back to landlord and negotiate, you need to provide a sweetener, it will be far more cost effective in the end, rather than moving twice or making a poor choice due to time constraints, not to mention further disruption to your business.

I tried that but the eviction is not over finances - it is over personal conflicts and hence, I definitely cannot get further time.

 

[geoffw]

Thank you for the analysis of the options. I must say that the trust option has never been put to me, possibly because I have no one to distribute it to.

With option two, whilst there are no tax savings, I think it would be correct to say that because I do not pay the 100k rent, even without the tax savings, I would overall have more cash in hand right now? With the least complexity and the least accounting / legal costs?

You have more tax in your hand until tax time. Then your income has in effect been increased in effect by $100K. Mr taxman will have his hand out.

You seem quite determined to be paying the maximum amount of tax in order to pay your accountant the least amount of money. The costs of an SMSF aren't that great, over and above whatever accounting fees you already pay.

This site suggests that the average super fund for 2010 was $830,000 and the average operating expenses were $4,480.

Get your accountant to tell you how much it will cost you. Compare that with what Terry has told you that you could save in tax. I suspect you will be way ahead with the SMSF.

In a high risk profession, if you were to be sued, your assets could be taken away from you. A trust provides a layer of protection against this happening. So for a few thousand dollars you could save yourself hundreds of thousands of dollars. If you are in any medical related profession, I'd suspect that it would be almost mandatory for you to have a property in a trust at minimum, but with the SMSF providing maximum tax benefits.

 

[geoffw]

No what I am saying is that if I vacate the premises which the SMSF owns and it is lying there vacant, then I have lost one of the key benefits of smsf, which is paying 15% tax on rental income received. Vacancy means no rent at all.

OK, I see what you're saying.

You're going to lease the premises to yourself, but you're going to be an unreliable tenant? I'm not sure why you're talking about vacating the premises at all.

If you really are looking at something which may change in the next few years, get a lease with an appropriate term instead of buying.

Another point- if you are buying an existing commercial premises, my understanding is that you should be registered for GST in order to avoid paying GST on the purchase. I'm not sure if you can do this if you're buying in your own name- you may be able to, but get advice.

 

[china]

Will your business be worse of if you move 6.5 km or if you have a few weeks off to get everything in order closer to you current locality . Without out knowing specifics , I'd guess the later .

What happens when you take holidays or get sick ?

I'm assuming your clients world doesn't stop.

As a GP I found it was better if I just closed down when I had holidays . My patients all came back .

I don't know whether the business would be worse off if I moved 6.5km away or closed for a few weeks. This very issue has kept me up at night, trying to work out the lesser of two evils.

Both positions would involve loss of cllents and loss of income. Some old and frail simply won't travel the 6.5km and I guess if the premises were closed, but the phone is still on, I may be able to survive without too much injury.

Interestingly, since I began business five years ago, I have never closed down for more than one week - only between xmas and the new year.

I have personally never been away for more than four days at a time during this five year period and my staff is still answering the phone at the office when I am away during the four days.

If you are going to move locally and open in a couple of weeks time , this is a great opportunity to do a mail out to all of you customers telling them of your hours . You can also use it as an opportunity to do a letter drop to the surrounding suburbs . This is legal as a doctor and I'm assuming for you as well.

Yes, I will need to do several rounds of mail outs, letter bombings of referrers and clients.

In Terms of clarification of zoning , council should be able to give a good indication very quickly. You can always make the purchase subject to council approval.

The agent advised me that I need to contact town planner who will give me a result in six weeks with regards to zoning. The place was recently used by the commonwealth bank who left about six months ago. My business is quite different from banking. As a hypothetical example, I just wonder whether I could get a result in terms of council approval for medical consulting within six weeks. I wouldn't wish to get a failure after six weeks because I would then be completely screwed because the six weeks could have been used to have moved to the premises 6.5km away

If a commercial place is for sale and rent , it might be more negotiable . How long has it been for rent / sale .

Cliff

The place has been vacant and advertised for sale /lease for six months.

 

[china]

OK, I see what you're saying.

You're going to lease the premises to yourself, but you're going to be an unreliable tenant? I'm not sure why you're talking about vacating the premises at all.

If you really are looking at something which may change in the next few years, get a lease with an appropriate term instead of buying.

Another point- if you are buying an existing commercial premises, my understanding is that you should be registered for GST in order to avoid paying GST on the purchase. I'm not sure if you can do this if you're buying in your own name- you may be able to, but get advice.

I may for example vacate the premises because I wish to stop working or illness or accident. I don't know the time frame is for this. I may reach my passive income goals and decide to chuck it all in. So I can't really say - could be seven to seventeen years. Leasing is not something I want to entertain again.

And the premises are likely to remain vacant for some time. And the smsf will still be holding onto the vacant office with all the associated charges.

I am seeking advice on the GST issue. I am a sole trader registered for GST as my quarterly BAS payments regularly remind me. I think whether I have to pay GST depends on the current and future usages of the property in question.

 

[see_change]

Talk to the council , not the agent . I would have thought if its commercial , do you need to get approval ? Again talk to the council . Personally , if approached the right way , I've found councils and their employers are very helpful.

It might be worthwhile talking to some one who specialises in that area .

We used Ian Glendining of Glendining Minton in thornleigh . He used to be the general manager in ku ring gai council , so for our area , he knows what can be done.

IMHO , moving would give you a greater loss , than closing for a few weeks.

How often do you clients visit . How many will actually , miss a visit . Some frequent attenders , but if you make a virtue of the fact that you want to stay in the area , I'd be surprised if you loose many of your regulars , however these may be the ones who can't travel as easily.

If you gave the general area , you may find forumites can give you a reco.

Cliff

 

[china]

This site suggests that the average super fund for 2010 was $830,000 and the average operating expenses were $4,480.

Get your accountant to tell you how much it will cost you. Compare that with what Terry has told you that you could save in tax. I suspect you will be way ahead with the SMSF.

In a high risk profession, if you were to be sued, your assets could be taken away from you. A trust provides a layer of protection against this happening. So for a few thousand dollars you could save yourself hundreds of thousands of dollars. If you are in any medical related profession, I'd suspect that it would be almost mandatory for you to have a property in a trust at minimum, but with the SMSF providing maximum tax benefits.

I agree with the above, as long as I keep renting the office from the SMSF and am paying the smsf regular rent. The accountant's fees for setting up the smsf, the holding company and bare trust to hold the property come to about 6k. I have been told that this is not tax deductible.

As I understand it, when smsf controls the property, the property is held in a bare trust giving it a degree of protection?

 

[china]

Talk to the council , not the agent . I would have thought if its commercial , do you need to get approval ? Again talk to the council . Personally , if approached the right way , I've found councils and their employers are very helpful.

I think a development approval needs to be formally submitted for example to go from banking to medical consulting? This can take six weeks? For example, medical consulting requires ample car spaces?

It might be worthwhile talking to some one who specialises in that area .

I thought that this "specialist" would be a local town planner?

IMHO , moving would give you a greater loss , than closing for a few weeks.

How often do you clients visit . How many will actually , miss a visit . Some frequent attenders , but if you make a virtue of the fact that you want to stay in the area , I'd be surprised if you loose many of your regulars , however these may be the ones who can't travel as easily.

If you gave the general area , you may find forumites can give you a reco.

Cliff

The business really depends on referrers generating new clients rather than regulars. Some new clients are generated by my online marketing efforts. The existing clients that need to come regularly - I would contact by mail.