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:
Arguments against selling your business premises
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.
Arguments for selling your business premises
1. Improve liquidity of your investment portfolio
Murden often sees SMSFs with investment portfolios that are dominated by a single, costly property such as the members’ former business premises. This can lead to various difficulties for the fund, including poor liquidity.
SMSF trustees are legally required when setting their investment strategies to consider, among other factors, the ability of the fund to pay member benefits when necessary. Member benefits include lump sums on retirement and death as well as pensions. Obviously, pressure to pay such benefits increases as the members of a fund age.
In short, valuable business premises – particularly if designed for a specific purpose such as manufacturing a particular product – may be difficult to sell within a reasonable time for a satisfactory price.
Even if your commercial property is not held in an SMSF, liquidity of an investment portfolio is a crucial issue – particularly for retired investors. Liquidity may not have been such a priority when the members were earning incomes from their business.
2. Further diversify your investment
Again, SMSF trustees are legally required to consider portfolio diversification and investment risk when setting their funds’ investment strategies.
And the ability for super funds or individual investors to spread their risks and opportunities by having an appropriately diversified portfolio is often limited if most of the money is invested in a business property.
Undoubtedly, many retirees would be uncomfortable with having their retirement lifestyles dependent on the performance of a single asset.
Martin says the departure of a tenant can be a particular problem if your super fund’s assets comprise mainly a business property. Much of the fund’s financial wellbeing may depend upon regular payment of rent.
3. Escape from having to look after your property
In retirement, many retirees would not want the task of managing an investment property including dealing with tenants and maintenance. Management of a direct property can still be a burden even with the services of a property manager.
“No-one wants to go overseas on retirement and be cruising down the Rhine when the tenant phones with a problem,” says Murden.
4. Understand that CGT often may not be payable on the sale of your business premises
Fear of a huge CGT liability would make some SME owners reluctant to sell their business premises held, say, in their own names or in a trust – particularly if those premises have significantly risen in value over the years.
However, Richards explains that the small business CGT concessions – together with the 50% general CGT discount (applying to individuals and trusts) – often eliminate CGT on the sale of “active” small business assets. Such assets include the premises of a business.
Some SME owners sell all of their business assets and contribute the proceeds to super if possible. (Super contributions from the proceeds of small business assets that qualify for the CGT small business 15-year exemption or retirement exemption are excluded from the non-concessional contributions cap up to a lifetime limit of $1.255 million for 2012-13.)
What if the business premises were held in an SMSF at the time of their sale? As discussed, CGT is not payable on the sale of assets backing the payment of a superannuation pension.
This article originally appeared on SmartCompany