Commercial & Business

Investing in commercial property can be a lucrative decision provided the asset is well located and the right steps are taken in the lead-up to the purchase. From doing due diligence on the property’s viability as a commercial premises to reviewing the lease with the tenant and understanding the tax implications of the purchase given your business structure, there is a lot to get right to realise your return on investment.

In this post, we’ll try and address some of these key considerations to help make the process clearer, while reminding that the advice and guidance of a legal firm with real-world experience in the buying and leasing of commercial property can be essential to getting it right before committing time and money.

Business structures and tax implications

Before embarking on a commercial property investment it’s important to understand how your business structure will affect the tax payable on the asset – which may determine whether it is worth going forward with the investment or not.

Individuals: Owning the property in your own name can be the simplest way to secure a commercial asset, when compared with business other structures. Rental income is incorporated as part of your assessable income and taxed at your marginal tax rate. This means negative gearing losses on the property may be offset against your income.

Like owning residential property, tax must be paid on any capital gain made from the sale of a commercial property, which will be added to the individual’s assessable income. Goods and services tax (GST) may also be charged on the sale price if the ‘going concern’ assumption isn’t satisfied – this means that both the buyer and the seller are registered for GST, that there is a current lease in place on the property, and that everything necessary is being done to support the ongoing operation of the business. The buyer then pays GST on one-eleventh of the sale price and claims credits on purchases that relate to selling the property.

If you’ve owned the property as an individual (or as part of a partnership or a trust – see below) for at least 12 months, you may be eligible to discount your capital gain by 50 per cent.

Partnership: Two or more partners who carry on a business in common with a view to profit are also considered a partnership for tax purposes if they own a commercial property together. Each partner, therefore, claims a share of any net profit or loss incurred by the partnership so that if its commercial property is negatively geared, each partner may offset their share of the net loss against their own income. If each partner is an individual or owns their share through a trust, the 50 per cent CGT discount will apply if the property is sold and a capital gain is made, provided that the property has been held for at least 12 months before its sale.

Company: At the outset it should be noted that commercial property owned by a company becomes one of its assets and therefore can become the subject of civil litigation or bankruptcy proceedings. But signficantly, tax paid on the property’s net rental income is charged at the corporate tax rate, which is lower than a high-earning individual’s marginal tax rate (inclusive of the Medicare levy). Capital gains are also taxed at 30 per cent and some companies may be eligible for small business CGT concessions.

Negative gearing losses on the property, however, must be absorbed by the company and can’t be employed to offset another entity’s income. The loss, however, can be carried forward indefinitely or used to offset the company’s future income and capital gain if the property is sold.

Property held within a company structure must also pay GST on one-eleventh of a commercial property’s sale price, but can claim GST credits on purchases that relate to selling the property.

Trust: Commercial property can be held by a unit trust, family discretionary trust or hybrid trust. Property held within a discretionary trust is generally protected in the event of litigation against a beneficiary of the trust.

Another key benefit of commercial property held within a trust structure is taxation because the trustee can distribute different amounts of net rental income to different beneficiaries based on their tax position each year, minimising each beneficiary’s tax liability. Like individuals and partnerships, if the trust makes a capital gain after owning the property for at least 12 months before it is sold, the 50 per cent CGT discount will be available if the capital gain is distributed to an individual or another trust.

Self-managed super fund (SMSF): Using this entity for purchasing commercial property is considered complex but the pay-off is the substantial tax benefit available. Rental income from the property is taxed at 15 per cent when held by an SMSF, and drops to zero at the time the fund moves into its pension-paying phase.

SMSFs can claim a capital gains tax discount of 33 per cent while the fund is in the accumulation period after the asset has been held by the fund for more than 12 months. The fund pays 15 per cent tax on two-thirds of the capital gain, equal to 10 per cent of the total capital gain. Negative gearing the property under the SMSF structure is not as effective as for an individual, because the losses are only offset against income taxed at 15 per cent during the accumulating phase.

SMSF entities must be registered for GST if they own a commercial property and annual turnover exceeds $75,000. GST must be paid on one-eleventh of the sale price, but GST credits can be claimed on any purchases that relate to selling the property.

It’s important to note tax deductions can generally be claimed by commercial property owners under the structures discussed above. These include interest paid on the loan used to purchase the property, travel costs related to attending the property, repair, maintenance and property management expenses, and depreciation of the asset.

Seek expert tax advice

What we cover here is general only in nature, subject to a number of exceptions and qualifications, and also invariable changes in the law. Suffice to say it is vital that you take advice from your accountant before settling on the structure you intend to use.

The importance of due diligence

The due diligence process is crucial before an investment in commercial property for a buyer to be fully aware of the technical, legal, financial, planning, environmental and risk management issues associated with the asset. Areas requiring close attention before signing a contract of sale include:

Condition of the building: An established service industry to commercial property investors is building consultants, who can be contracted to complete a comprehensive technical report assessing the asset’s structure, from façade and walls (external and internal), roof and guttering, ramps and stairs, entry lobbies, floors & floor finishes (carpets, tiling, etc.), ceilings, stairways and amenities such as kitchenettes.

The report can also assess any mechanical and electrical systems such as lifts, escalators, switchboards and airconditioning, and also address fire protection systems, water supply, sewerage and stormwater systems.

Location: This is perhaps the most important of all considerations for a commercial property and requires a prospective buyer asking questions including:

• Is the building located in a good area with foot traffic, parking and access to public transport?
• Are there zoning regulations which will restrict what commercial use the property can be put to?
• Is the property close to amenities such as schools, transport and other shops?
• Are there direct competitors close by?

Planning and environment: This step involves discovery of current zoning and height restrictions to confirm the property can be used for the commercial purpose you intend; reviewing changes made to the original development application; obtaining copies of original occupation and development certificates; fire safety statements; recent environmental or heritage assessments, and any existing contamination issues (e.g. asbestos, etc.).

If buying vacant commercial land, a buyer should obtain a signed written notice from the seller or agent stating that the land is of a commercial nature and is not capable of being used for residential purposes, now or into the future.

Financial: A financial assessment includes examining an existing lease of the building and, if not leased, the current market conditions that determine the likely value and potential of renting the property.

Assessing lease arrangements involves sourcing lease documents from either the current owner or the tenant to discover:

• expiry dates and options to renew, including the rent review process and its frequency;
• whether there are planning approvals granted prior to entry into the lease;
• that there are no ‘first rights of refusal’ to purchase;
• that there are no other restrictions within leases that might affect the sale or your capacity to operate or expand the building;
• details of any bonds/deposits/bank or personal security guarantees held;
• details of tenant’s agreements regarding maintenance and repair;
• details of any caveats lodged;
• whether the tenant/s are in arrears;
• whether GST is being charged (longer-term leases may not include this provision, which may affect the buyer’s decision to purchase).

Title: The land title of the property should be checked to see there are no liens or encumbrances on the property, no easements or rights of way, and that it is registered in the correct name.

Leases: A would-be buyer should first check the lease of any existing tenant/s to determine both its length and its terms. A lengthy lease on favourable terms to the tenant may be influential on the decision to purchase. Likewise, the need to find new tenants could be off-putting. The length of the lease may also affect the buyer’s ability to renovate and alter the property.

Insurance: Any commercial property should be covered for public liability, contents and the risks of fire, flood, theft and vandalism. If finance is needed to purchase the property, the lender will likely require a policy that provides coverage equal or greater than the value of the loan.

Seek expert legal advice

Legal professionals with specialist knowledge of purchasing commercial property can make the due diligence process described above far more streamlined and stress-free. At PD Law, we can check existing leases, caveats and covenants over the property, title details, existing maintenance contracts, insurance policies and all of the many other details required to make a fully informed investment decision on commercial property.

For more information on any of the material covered in this article, contact PD Law today for a comprehensive initial discussion.

It’s no secret that many people buy into community title developments without necessarily appreciating all of their costs. On top of this, catastrophic weather events such as cyclones and floods have resulted in staggering increases in insurance costs, described as ranging from substantial to outright unviable.

It’s also no secret that some lot owners will … not may … struggle with payment of increased levies. Armed with this inevitability, it’s crucial that bodies corporate face this nacent problem head on practively to avoid their own catastrophes.

Debt collection should not be the first lever to pull, and frankly, going through the stock warning letters is not always going to yield favourable results. We’ve seen it have the opposite effecrt, driving those owners already on the edge further into denial territory.  

Instead, proactive committees have an opportunity to be actively inviting lot owners who may struggle with increased levies to discuss alternative payment plans to try to avoid unnecessary legal cost. It may involve an extra step or two by way of extraordinary meetings but the alternative is legal spend and we know who wins…

Although some circumstances may require immediate and urgent action, as a general rule internal management avenues should be completely wrung out before pressing the legal action button. A second and very important benefit in doing this will bolster the body corporate’s position that its recovery costs are reasonably incurred.

If we can help, give us a call, even just to clarify options. We don’t just move straight to debt recovery action – we’ll try to find a plan B with you first.

To make an inquiry or book an appointment, phone 4946 6670 or book online 24/7.

For further information go to www.pdlaw.com.au/family-lawyers or email enuiry@pdlaw.com.au

It’s been a long few months: you’ve spoken to dozens of agents, brokers and banks, builder friends and family members and you’ve decided on the dream home. The agent prepares the contract and asks if you want the usual ‘get out of jail’ clauses –pest and building inspections and a finance clause.  Surely this covers me.

You and the seller sign the contract, but because cash is a bit tight you decide against talking to the lawyers straight away. After all you’d rather not run up a bill just yet until you know your finance application, pest and building inspections are all ok.

As expected they are all OK and you tell the seller everything’s good to go.

You then make contact with the lawyers who begin to go through the contract. You’re pretty comfortable with the questions until you’re asked if you knew whether the house and shed are council approved. I think so. The house looks great and you’ve just had two inspectors say everything checks out.

The lawyer goes on, explaining the building inspection has nothing to do with whether the improvements are legal, and to make matters worse there’s nothing in the contract fine print to say improvements must be council approved.

You barely hear the rest. You look across to your partner (you’re on speaker in the car). Will your insurance cover you? Do you have to make the house compliant? What about your renovation plans now?

At PD Law our fees are fixed regardless of when you call, so don’t delay making contact. We discuss these and many other issues up front, so you can ask as many questions as you want, before it’s too late.

And remember Latin’s most important legal phrase– caveat emptor – buyer beware.

“It just crawled into that bloody hole in my glove!”

Last weekend I had the great pleasure of harvesting and extracting honey the traditional way from my parents’ bee hive: white overalls, the funny veil, bee smoker, the whole show. And later at their home, separating the honey using this old  extractor (really old – over 100 years!) which belonged to my great uncle and probably someone before him. Yes there are more innovative (and evidently less painful) processes, but this was a truly fascinating and thoroughly enjoyable experience.

When not dressed as a bee whisperer, I spend a lot of time with our team here at PD LAW looking for better ways to do things. Nothing’s allowed to remain just because ‘that’s how everyone does it’, and if we can operate more efficiently and increase accessibility to quality legal services, we’ll give it a crack.

Recently we installed a new phone system that lets clients navigate directly to the person they’re after instead of having to explain themselves to reception and other staff each time they call  – gone is the ‘may I ask what it’s regarding?’ question. Go straight to the source.

Next week we’re rolling out a new online appointment scheduling app on our web page (see below image) which lets you choose an appointment time on your smartphone from the comfort of your own home at 9:30 PM while binge watching Game of Thrones on Netflix (no you’re not the only one tired!).

I know neither of these is strictly new, but we’re already looking for ways to get these tools to do more than the typical offering: for instance our appointment scheduler will also let you choose the team member you want to see, instantly upload docs you might want looked at before the appointment, select your meeting format preference (at the office, skype or phone etc.), an online chat option, and heaps more. And you haven’t even had to call us yet!

So there it was, in the space of a week I experienced the highs of seeing new, innovative and value adding products take shape for our business and clients, and also witness first-hand the honed efficiency of a tried and tested system that just works so beautifully.

Oh yeah, and the poor bee that wriggled its way into the tiny hole in my glove received a robust round of applause from said glove wearer. Casualty of war.

It’s a trite comment to say Apple has got it right. A cursory Google (or perhaps Safari?) search will reveal the message behind the Apple brand, and how it is supported with an almost religious zeal by its followers, and its team. No we don’t think we’re Apple, or Google, or Coke, or the North Queensland Cowboys, and we don’t expect to have raving fans (we’re lawyers after all), despite what social media experts suggest.

But, we do think we are a pretty forward-thinking bunch: efficient, with a fresh and evolving approach to personal legal and business issues.

With this in mind we embarked on updating our logo.
Along the way, we researched, and we read, and read (we’re lawyers after all), and learned that re-branding, or even just freshening our brand, involves more than a brief to our graphic designer. What will our brand say about us, and how we communicate? What’s our client service really like? What do our people think of it?  What do our clients think about it? How does it showcase our business and its various parts – our capability, our strategy, and where we’re headed?

For us, the process was frustrating, challenging, confronting, enlightening and ultimately extremely rewarding.

We’re very proud of our new logo, and we’re equally proud of our ever evolving brand.

We’re also thankful for our amazing graphic designer Lucie, who is eternally patient!

I’LL CUT MY OWN DEAL THANKS 

Keeping the lawyers out, and other good ideas. 

 ‘Just keep it simple and to the point – the last thing I want to do is scare them off.’ 

Everyone, and I do mean everyone, leads with those words when they’re providing instructions. It’s understandable. Apart from obvious reasons like overcapitalising on cost, none of us like to raise any potential problems with the person we’re doing a deal with. It’s a difficult conversation and we’d all rather avoid it. It’ll be alright.

Most of us successfully DIY our day to day legal transactions like privately selling and buying some personal assets, engaging contractors to do work, negotiating most work / business contracts and so on. At some point though the line blurs and before we know it the inner lawyer in us all has done a runner, and in his place sits a desperate panic merchant, silently praying nothing will go wrong:

“If things go south right now, I’m in a world of pain”.

How about some free lunch?

I’m not advocating using a lawyer for everything. On the contrary I encourage legal self-help.

So, if you find yourself in a position where you need to pay more than the usual amount of attention to a transaction, keep in mind these things:

• What are you, or the other side promising to deliver?  

Some contractual promises, also called warranties, are considered so important in an agreement that a breach entitles the aggrieved party to terminate. Make sure you know what you’re promising and what the other side is promising.

•  If something goes wrong, what’s the next step, and who pays? 

Use the ‘if then else rule’.  Our team relies this rather dull mantra all the time when working with clients to help negotiate their transactions. It loosely translates to ‘if something happens, then what do we want to happen as a result, and failing that what is both parties’ agreed fall back position’.

Give some thought to what will happen if somebody cannot perform an obligation under the deal you’re negotiating. does that mean either of you can terminate? or something less, like a fixed reduction, or automatic extension? And if that won’t happen, what then is the fall back that you can both agree on?

Tie up as many conceivable loose ends at the start, to avoid arguments and uncertainty at the end.

•  How exposed are you? 

Let’s say you’re the one giving warranties, and you end up being the one who cannot perform. What happens if you can’t perform? What are you risking and how easy is it to get out? If you don’t need a lawyer for the agreement itself, consider whether you need one for some asset protection advice.

•  Any knock on effects? 

Sometimes the immediate and obvious breach (and consequential loss) is not the issue. Instead, it might be that the aggrieved party suffered an indirect loss that could be considerably larger than the immediate or obvious loss under the primary agreement.

Make sure you know what that loss could be, or that you limit or cap your liability.

 Unscrambling the Egg 

The best thing about DIY legal is the money you save and the satisfaction that you’ve done it yourself. The worst is having to engage a lawyer after the eggs have been scrambled so to speak. It’s sometimes too late: conditions and expectations never settled, consequences never agreed, losses never capped.

If you’re unsure, give us a call. We are more than happy to talk to you about whether you need us, and what it will cost, and it’ll be your choice whether you want to take us up.

Business Mobility, Knowledge Workers and Choice

20 years ago our reception area was frequently short on chairs. A combination of limited technology, and traditional expectations of lawyer / client relationships meant that often, business was conducted face-to-face. Today, the business of law is vastly different, and for good reason.

• First, people don’t have time to leave what they’re doing.
• Second, technology has opened the door for us as knowledge workers – it’s truly revolutionised the way we offer our services, where and to whom we can offer it.
• Third, and most importantly, consumer choice is practically unlimited. Now, more than ever, excellent service offered via a client’s device of choice is the real driver. Choice will be determined by quality of service and value for money.

And this is just the beginning. A white paper recently released by a major international technology corporation involved a survey of almost 5000 people from eight different countries, how they are using technology now, and what their expectations were going forward. Not unexpectedly it found that the trend for embracing services such as law via modern technology is increasing exponentially.

We don’t need to take your temperature

We’re often asked if our clients need to meet us face to face. This question is topical, and the answers important:

• You rarely, if ever, need to sit opposite us
• You always need prompt and unlimited access to us
• You always need quality professional advice that adds value
• You always need excellent reliable dependable service.

21st Century law firm

Emails, VoIP conferencing (eg Skype, Google Hangouts, Face-Time) are readily available for all of us to embrace and leverage from.

In fact, right now we’re in the process of adopting a new electronic conveyancing system, already successfully implemented in southern states. I’ll talk about this some more later, but for now, this new process will enable us to conduct conveyancing settlements for all property transactions anywhere in Queensland on a secure online platform. It will truly revolutionise the way we practise, and we’re excited to be a part of the change, and to offer this new service to our clients very soon.

The days of having to carry around some paper, or remember where you saved an important document are gone. How often do you find yourself looking for an email someone sent you? We already offer our clients across the State a secure online portal, accessible 24/7. Everything’s kept in one place.

All our client needs is access to the web. The rest is easy.

PD Law – Queensland Wide Service

At PD law, we operate a truly State Wide service, with clients from Coolangatta to Cape York, in a variety of areas of law:

• business planning and strategy
• residential conveyancing
• property development
• personal estate planning.

So don’t limit your opportunities. We are available for you, wherever you are.