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Finding the Right Business Premises

Choosing the right type and location for your business premises is one of the most important and difficult decisions business owners have to make – Peter Bembrick sifts through the options, from SOHO to splashing out on buying property, and considers the positive and negatives in each case.

Choosing premises can be one of the biggest costs for a business, and it’s important to get value for money. As well as considering practical issues such as the location, size and layout, financial implications are a major influence when deciding which option is best.

Running a business from home is becoming increasingly popular, and is one low-cost alternative, particularly for start-ups. For a business that requires an external location, the most common ways are to lease or buy premises. Or, for those not requiring storage or manufacturing facilities, it’s common to rent a serviced office.

There are many options and they need careful consideration, with a long-term view. What seems right now, might not be right a few years down the track. This decision can be crucial to success, and even survival.

Serviced Office

Active ImageThe comparatively low cost and short-term commitment of a serviced office makes this an attractive option for businesses just starting out, where a small amount of office space is all that’s required. It’s also a useful approach when setting up an interstate representative office.

There are a number of organisations providing serviced offices, and such arrangements are also often offered in the premises of larger professional services businesses such as accounting and law firms. Typically, a serviced office arrangement will include furnished office space and the use of shared facilities such as reception, administrative and secretarial staff, IT and office equipment, and meeting or board rooms. The business pays rent for the space, and is usually charged an additional service fee for the various shared facilities, depending on usage. Rent and the service fees are tax-deductible to the business as they are incurred.

This arrangement can be attractive because the business only pays for what it uses, avoiding the commitment and expense of sourcing all the space required, including meeting rooms, as well as employing support staff and acquiring the office equipment that would be required to run a stand-alone office.

However, if use of shared resources is high, the service fees can become expensive compared with hiring dedicated staff and equipment. As the business grows, the time may come when the serviced office is no longer suitable or cost-effective.

Businesses that have outgrown serviced offices usually move on to leasing as a next step, and small manufacturing, wholesale or retail businesses often have no alternative to leasing their own premises from the start.

Leasing Issues

Leasing is a major financial commitment, as the business is usually expected to enter into a lease for an extended period. Deciding on the space required is difficult. Does the business need meeting rooms and a reception area? What space is needed for the computer system and office equipment? If a lease of four or five years is being considered, what space is needed for expansion?

When entering into a lease for business premises, business owners will need to consider:
• the initial lease period, and any option(s) to renew for a further period;
• when, how often, and by how much the landlord can increase the rent;
• outgoings, such as rates, land tax, insurance and maintenance, that the landlord is entitled to pass on to tenants;
• whether there are any restrictions on the use of the premises;
• whether there are any restrictions on sub-letting;
• whether there are any shared facilities such as car parks or kitchens;
• the ownership of any fixtures, fittings or improvements to the leased areas.

Office rent and payments for leased furniture and equipment are tax-deductible to the business. Where furniture and equipment has been acquired for cash or under a hire purchase or other such financing arrangement, tax deductions will be available for depreciation of the assets, and for the interest component of any repayments made.

Office fit-out costs in the nature of building fixtures will be eligible for the 2.5 percent per annum capital works deduction, as long as the business has ownership of the fixtures, or has a right to be compensated for them on termination of the lease.

Buying Issues

Active ImageAs a business grows, buying business premises is worth considering. Although it can be a significant capital commitment, when the business can show a good profit history and growth and has accumulated capital, the purchase of business property can be a very attractive option. But even for established businesses with access to capital, it’s important to consider whether the funds could be better used elsewhere.

The advantages of buying premises include:
• greater control over use of the premises, and the freedom to make changes to the buildings without needing a landlord’s permission;
• security in the premises (for example, depending on the terms of a lease, the business might be forced to move if the building is sold);
• having an investment in the property, so any improvements to or increases in value of the property will benefit the business, not a landlord, and what was rent can be used to pay off a mortgage, giving the business a major asset.

The disadvantages of buying premises include:
• being locked in to a location, it is more difficult and costly to sell the property and buy or lease new premises than to simply move;
• the risks of ownership, including the potential for little or no capital growth or even falling prices, and the inability to benefit from falling rents, such as when commercial property is in plentiful supply;
• the need to finance the purchase leaves the business exposed to rising interest rates, and more accountable to the bank for the performance of the business.

When a business owns its premises, tax deductions are available for holding costs such as rates, building insurance, land tax or strata levies; interest paid on any loans to purchase the property or other business assets; depreciation (over the useful life) of business equipment, furniture and fittings not regarded as forming part of the building; and capital works deductions at 2.5 percent per annum on the original construction cost of the building (where built after September 16, 1987), and property improvement costs (including fittings regarded as part of the building) incurred after February 27, 1992, even where the costs were incurred by a previous owner.

There are alternatives to the business owning its premises. The business owners, their family trust or superannuation trust can own the premises. This can offer a number of benefits, most notably that it’s a good way of getting capital out of the business and into the hands of the owners in a very sensible and tax-effective way.

Instead of paying rent to a third party, rent is paid to the owners. The owners know they have a secure tenant and the business can be confident it has security of tenure.

* Peter Bembrick is a tax partner with accountants, and business and financial advisers HLB Mann Judd.

Super Schemes

While there are many advantages to having a superannuation fund own the business premises, including a tax rate of 15 percent, there are strict rules governing the types of assets that superannuation funds can invest in. One of the main exceptions is for business real property (real estate), such as property that is used wholly or exclusively in carrying on one or more businesses.

This exception means the owners of small and medium businesses are able to have their self-managed superannuation fund acqu
ire the business premises or, if the business owner or business entity already owns the premises, to transfer the property to the superannuation fund for its market value. Usually such a transfer will require the business owner or entity to make a large superannuation contribution. It’s essential, however, that the property is not used for any private purposes, and the business pays a market rental to the superannuation fund for use of the property.

Because superannuation funds are not permitted to borrow, funding for the purchase of business premises must be sought by the business owner or business entity. The tax deductibility of any loan interest will be dependent on showing the borrowed funds were used for business purposes.

While such an approach may be tax-effective, desirability depends very much on the overall investment strategy of the superannuation fund, and on assessment of the likelihood of capital growth in the value of the property until either the retirement of the business owner(s), or the likely time of sale of the property.

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