Is it a smart idea to sell your business premises – owned in your own name or through your self-managed super fund – at the same time as selling your business? Or should you consider holding on to the property as an investment?
There are powerful arguments for and against simultaneously selling your business and your business premises. And tax, business and superannuation specialists warn the wrong decision could cost an SME owner a lot of money in lost tax benefits, income and capital gains.
The Survey of Financial Needs and Concerns of SMSF Members, recently compiled by Rice Warner Actuaries, shows that pre-retirees surveyed held an average of 13% of their portfolios in business property, falling to just 2% in retirement. (The survey covered super and non-super assets.)
Rice Warner suspects the sharp reduction in exposure to commercial property indicates many business owners sell their business premises when selling their businesses.
Of course, the question of whether to sell business premises at the same time as selling the business confronts SME owners at various stages of their working lives, including when they are selling a business to buy another.
Martin Murden, director of SMSF consulting with the Partners Group in Melbourne, says there is no right answer to the question of whether business owners should hold on to their business premises after selling their businesses. Much should depend on the circumstances.
Here are the cases for and against selling your business premises when selling your business:
1. Target the sale of your business to many more potential buyers
Tax and superannuation lawyer Robert Richards, principal of Robert Richards & Associates in Sydney, says by selling the business without the premises, more buyers can afford to buy it. And as part of the deal, you could offer a very long lease on the business premises – which, in turn, should provide you with a reliable income.
“A lot of buyers of businesses don’t want the business premises or they don’t have the money,” Richards says. And he adds that many buyers would want to spread their risks by not having their real estate investments and their business mixed together.
“By trying to sell your business premises and business together, you are straightaway reducing the number of target buyers,” Richards emphasises.
2. Continue to profit from your business – after its sale
Richards points out you could continue to benefit from the profitability of your business after its sale by renting its business premises to the new owner.
And he asks: “If you know your business is good, wouldn’t it make sense to know you will get a good return on the property [by renting it to the business’s new owner]?”
3. Profit from your knowledge of the property
“Having run your business from the property for a number of years, you should know not only the property but the location,” says Martin Murden. “And you should know of any redevelopment opportunity [for your property].
“We have seen inner-city warehouses converted into properties,” says Murden. “And we have seen the prices they fetch.
“You might decide to hold on to the property for a few years to find a developer who may pay much more than it is currently worth,” he adds.
4. Continue to receive a concessionally-taxed or tax-free rental income and capital gains
If your business premises are held in your self-managed super fund you will keep receiving the same concessional tax treatment on the rental income and capital gains, stresses Richards.
Rental income is tax at 15% a year while capital gains are taxed at an effective 10% during a fund’s so-called accumulation or saving phase (if the property is held for more than 12 months). And your SMSF will continue to receive the usual tax breaks of landlords.
Once the assets of the fund begin to back the payment of a superannuation pension, fund income and capital gains are tax-free. This means your SMSF can eventually sell a property in the pension phase without paying a cent in capital gains tax – no matter how much the asset has risen in value over the years.
SME owners may decide to hold their business premises in their self-managed super funds after the sale of their businesses for a range of reasons including tax-effectiveness, asset-protection, and succession planning for family businesses.
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