By: Max Newnham
It doesn’t matter whether a business is started from scratch, or any existing business is purchased, there are a number of factors that must be considered. Although one of the main considerations is maximising tax benefits for the owners, there are other matters that must be considered.
Q. My wife and I are about to set up a small tourist accommodation business that requires buying land and building accommodation units. We will also build a home for ourselves on the same land. We will borrow money to assist in the land purchase and construction costs. We will engage two cleaners for the rooms and we will also draw wages. I project we will make a loss for the first year.
From a tax perspective should we form a company to buy the land, develop the assets and employ us, or should we simply operate as sole traders using an ABN, or do we borrow, buy the land and develop the assets in our names then lease the facilities to a company which operates the business?
A. As a general rule a business and business assets should not be owned and operated through a company structure. This is because companies do not get any benefit from the 50 per cent general Capital Gains Tax discount, as only individuals receive the discount, and they do not effectively get any benefit from the small business CGT 50 per cent active asset discount.
Companies do have an advantage over operating as a sole trader, a partnership of individuals, or a family trust with individuals acting as trustees, with regard to limiting the legal liability of the owners. As you will be running a tourist accommodation business, and there is a risk that a guest could be injured and you would be sued, careful consideration should be given to removing this risk.
You should consider buying the land in your personal names, build your home and accommodation units using the borrowed funds, and then rent the accommodation units to another entity that runs the business.
The most tax effective entity is a discretionary family trust with a company acting as trustee rather than you as individuals. By doing this your land and buildings would be protected in the event that the business was sued, while you would be operating the business through a structure that provides you with full access to the CGT general discount and the small business concessions.
The family trust would employ the cleaners and pay rent to you as the owners of the property and the accommodation units. You could claim a tax deduction for the interest on the loan. This would be limited to the portion of the loan that relates to the cost of the land used by the business and the construction costs of the accommodation units.
You should seek professional advice before taking action, as there are number of other options that should be considered to help you maximise your tax benefits related to setting up your small tourist accommodation business.
Source: The Age
