Buying Commercial Property for Your Business: Accounting and Tax Questions to Consider

Buying premises can give your business a more permanent base. It also commits capital to a property that may need to serve the business for many years.

Two decisions deserve separate attention: whether buying makes commercial sense, and who should own the property.

Buying premises for your operations does not automatically mean buying them in the trading entity’s name. Start with the business purpose, proposed ownership and funding before committing to a contract.

Does buying suit the business?

Consider how well the premises fit your operations today and your likely needs over the next several years.

Location, capacity and the cost of adapting the space matter. So does flexibility. If the business grows, changes activities or needs to relocate, how would ownership affect those plans?

Compare more than the current rent and proposed loan repayments. Include the deposit, transaction costs, rates, insurance, maintenance and any body corporate charges. Consider the funds needed for improvements and the possibility of paying costs at both locations during a move.

Leasing may preserve capital and flexibility. Buying may suit a business with stable premises requirements and the capacity to fund the commitment. Neither is inherently better.

Decide who is proposed to own the property

Identify the intended purchaser before treating the ownership question as settled.

The property might be owned by the trading entity or under a separate arrangement. Assess that choice against the current business structure, funding requirements, ownership relationships and future plans.

For example, would all business owners also participate in the property investment? If you eventually transferred the operating business, would you want to retain the premises?

These questions do not point to one universally suitable structure. They help establish what the ownership arrangement needs to accommodate.

Do not assume that changing the property owner later will be a simple administrative matter. A later transfer can require another assessment of tax, duty, finance and legal consequences.

Test affordability beyond the deposit

A purchase needs a funding plan for both completion and ongoing ownership.

Clarify the proposed deposit, where it will come from, which entity would borrow and what security or guarantees the lender may require.

Then examine repayments alongside the business’s working capital needs. Allow for slower trading, unexpected property expenditure and changes in borrowing costs where relevant. A forecast should show what remains available for wages, suppliers, tax and ordinary investment in the business.

Your accountant can help assess cash flow assumptions and prepare credible financial information. A lender or broker addresses lending options and requirements. The lender makes the approval decision.

Discuss the information needed for business finance while there is still time to test the proposed arrangement, rather than assuming an indicative discussion amounts to approval.

Resolve the GST position before signing

Commercial property purchases do not all receive the same GST treatment.

Ask your accountant and solicitor to review the draft contract together. The questions include whether GST is included in the stated price or payable in addition, what treatment the seller proposes and whether that treatment matches the transaction.

A reference to a sale as a going concern needs assessment. So does a proposal to use the margin scheme. These are not interchangeable arrangements, and neither should be accepted simply because it appears in the contract.

The margin scheme also affects the purchaser: the ATO states that a purchaser cannot claim a GST credit for a property bought under that scheme.

Where a GST credit may otherwise be available, the purchasing entity’s registration and intended use need consideration. Do not assume that the operating business’s GST registration answers the question for a different purchaser.

Include the GST position in the funding forecast. An expected credit is not the same as having funds available when a payment is due. Ask what timing assumptions are appropriate.

Allow for state charges and different tax treatments

Transfer duty and land tax are state obligations, separate from federal income tax and GST.

For a Queensland purchase, include transfer duty in the acquisition assessment. Potential ongoing land tax also deserves attention. Its treatment depends on matters including the owner type, total taxable Queensland landholdings and applicable exemptions. The purchase price alone does not determine the answer.

Legal fees, valuation costs, borrowing costs and other transaction expenses also need assessment.

For income tax purposes, paying an amount does not necessarily make it immediately deductible:

• The purchase price of premises held for business use is capital expenditure, not an ordinary operating expense.
• Acquisition costs need assessment as part of the property investment.
• Borrowing expenses have separate rules and may be deductible over time.
• Maintenance, repairs, improvements and replacement assets can receive different treatment.

Eligible building expenditure and depreciating assets may attract deductions under different rules. That does not mean the whole purchase price or renovation budget can be deducted at once.

Keep detailed invoices and records from the outset. Clear business records help your accountant distinguish the expenditure and identify which entity incurred it.

If the property owner and business are different

Consider the occupation arrangement alongside the purchase.

Discuss the lease, rent, outgoings, responsibility for maintenance and improvements, and what happens if the business moves. Your solicitor should address the legal agreement, with accounting and tax input on the proposed payments and records.

Common ownership is not a reason to leave these matters informal. The property owner’s income and expenses need to be distinguished from those of the operating business.

What to bring to an initial discussion

Useful information includes:

• Property details and the draft contract.
• The proposed purchasing entity and current business structure.
• Recent financial statements and cash flow forecasts.
• Indicative finance terms and the proposed deposit source.
• Any existing lease and expected moving or improvement costs.
• Plans for growth, relocation or future ownership changes.

Your accountant, solicitor and lender or broker have complementary roles. Bring them into the discussion while ownership, price, GST and finance terms remain open.

Speak with Jaha about the accounting and tax questions before committing to a purchase. The aim is to assess the property decision in the context of the business, not just the contract price.