Case Study: Is your business premises too small?

A great client of ours in the construction industry was growing too big for their existing commercial factory. They wanted to fit their large trucks and materials into the factory while also having an office space to run the business, it was a bit of a squeeze. They came to us to discuss what options they had, as if they wanted their business to continue to grow, they needed to solve this small factory issue.

How do they fund the purchase of a new factory? What could be done with the current factory? Who should purchase the new factory; themselves personally, the business or their existing Self-Managed Super Fund (SMSF)?

Like a lot of the successful businesses we advise, the client’s current factory was owned in the Self-Managed Super Fund (SMSF) and their business rented from it. Owning a commercial property in a SMSF and renting to their connected business is a great way to grow wealth, and there is great tax savings with this scenario. As funding the new factory personally was a stretch financially, or buying a major asset in the business is an asset protection risk, we explored buying it in the SMSF using a limited recourse borrowing arrangement (LRBA).

An LRBA is when a SMSF borrows from a bank to purchase an investment. This scenario is very complex with many ATO rules to comply with as well as the banks. Getting it wrong can have very negative consequences, including missing out on the factory purchase, CGT implications as well as stamp duty consequences. We have vast experience in getting the structure right as well as dealing with the banks to get the deal done for our clients purchasing the investments.

In this scenario we:

  • Established the correct structure to comply with the ATO rules. This is BARE trust with a corporate trustee to hold the new factory.  
  • Making sure the purchase contracts are in the correct name to comply with CGT and stamp duty.
  • GST registration and advice on the factory purchase. In most scenarios when purchasing a commercial factory, GST is applied. As the SMSF is now registered for GST, it can receive the GST credit back upon lodgement of the BAS.
  • Dealing with the bank to make sure the client met the funding requirements. This included a minimum deposit for the new SMSF, cash surplus in the SMSF bank account after purchase and a complete review of the clients business financials.
  • Organizing the drafting of new lease agreement between our clients business and the SMSF for the new factory. The lease had to comply with the bank requirements

After a lot of hard work, the client has now moved into a new larger factory that better suits their requirements and are running their business in more comfort. They are very happy and are now focused on further business growth.

We will continue to assist the client going forward to ensure the SMSF complies with the ATO requirements of the LRBA. Once the bank loan is fully paid out we will be able to wind the structure up with no CGT, GST or stamp duty consequences.

If your business is stuck in a small office, medical suite, factory, farm or even winery and are looking at ways to purchase a bigger and brighter space, please contact us to discuss your options.

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