Welcome to our comprehensive guide on how unrelated business partners can successfully invest in commercial properties using a unit trust structure. This approach, while intricate, offers significant benefits for businesses aiming to expand their physical footprint without the complications of personal ownership ties. If you’re exploring this strategy for the first time or preparing to discuss it with your advisors, this guide will clarify the process and set you up for success.
Understanding the Unit Trust Structure
What is a Unit Trust?
A unit trust is a specific type of trust arrangement where property is held by a trustee on behalf of the unitholders who own units in the trust. This structure is particularly advantageous for commercial property investments because it allows for a clear separation of ownership and operation, which is ideal for unrelated business partners.
Key Rules for Investment:
- Commercial Property Only: The use of a unit trust is restricted to commercial properties to avoid the complexities and legal restrictions associated with residential investments.
- No Blood Relations: Investors in the unit trust must not be related by blood, ensuring that the investment remains strictly business-focused and minimises personal conflicts.
- Equitable Ownership: No single partner can own more than 50% of the unit trust, promoting fairness and shared responsibility among all parties.
Case Study: Living Pets Proprietary Limited
Company Background
Living Pets Proprietary Limited, a thriving business, reached a point where expansion was necessary. The owners, previously operating solo, needed a larger space to accommodate their growing operations.
Formation of Partnership
Smithy, Jonesy, and Chany, three unrelated business individuals, joined forces to tackle the challenge. They decided to invest in a commercial property that would house their expanding enterprise.
Investment Structure
Each partner invested equally, acquiring 33.33% of the units in the unit trust which owns the property. This arrangement ensures that no single partner has a controlling stake, maintaining balance and shared decision-making.
Financial Benefits and Tax Implications
Using Superannuation Funds
The partners utilised their self-managed super funds (SMSFs) to purchase units in the trust. This strategy not only secures the property investment but also aligns with their long-term financial planning.
Tax Efficiency
Investing through a unit trust allows the super funds to benefit from a lower tax rate on rental income—only 15% compared to higher corporate tax rates. Additionally, the business itself enjoys tax deductions for the rent paid to the unit trust, enhancing overall tax efficiency.
Long-term Financial Benefits
One of the most significant advantages comes into play during the pension phase. The investments held within the SMSFs can potentially become tax-free, providing substantial savings and financial security in retirement.
Investing in commercial property through a unit trust with unrelated business partners is a sophisticated strategy that can lead to substantial rewards. However, its complexity necessitates careful planning and expert advice. It’s crucial to work with both tax professionals and licensed superannuation experts to fully realise the benefits and ensure compliance with legal standards.
Are you considering expanding your business through innovative investment strategies? Consult with your advisors to customise this approach to your needs. Ready to elevate your investment game? Contact our team for specialised guidance to ensure your venture into commercial property investment is a resounding success.