If you are self-employed or are the owner of your own small business, you may have wondered a lot about how everything is structured. Should you be contemplating going into business for yourself, then it is vital that you begin thinking along those lines.
Home ownership needs to be considered for small business owners
One aspect of this is how to own your home. Some of you may be thinking “What do you mean by that? We just own our home, that isn’t a problem!”
Well, there are important things to keep in mind. One is risk management. A self-employed person or small business owner can be in a risky position. There is a risk that someone could sue the business. Then there is the matter of a business not being able to pay its bills and other aspects of risk as well.
How the small business itself is owned will have an impact upon whether or not the family home is also at risk. A business which is operated in a separate structure will help. However, keep in mind that along the way if you provide personal guarantees for certain accounts, that could expose you to the liability of having to pay those accounts if the business cannot. Furthermore, if you are a director or trustee of the business, it’s possible to fail in some of your duties and end up being liable.
One approach taken by some small business owners is to have the family home owned by one family member and for the business to be owned and operated by a different family member. However, keep in mind that you cannot do that for the purpose of defeating creditors. That is to say, if you are aware that you are under threat and problems are looming, it may be too late to make that change. The best thing to do is to set up ownership of your home in the best way possible prior to any problems being experienced. A very natural way to do that is the next time that you move, set up the ownership of the new home in a way that is going to best suit your situation.
Some small business owners or self-employed people may decide to own their home through a family trust. This gives the further benefit of it being able to be used to benefit family members for generations to come, up to the time of the vesting date of the trust. A downside of that is that you will have to pay land tax on it, and you probably will lose the capital gains exemption for it that normally would be associated with the family home.
One way to manage both of those issues might be to also own an investment property directly. It should be one that you live in yourself for several months when you first purchase it. Six months would do. You should borrow as much as possible on this property, with as much cash as possible being left in the family trust. Do not use any of the property in the family trust as security for the loan on the property outside of the trust. You then move out of that property and into the one owned by your family trust. The property in the trust could have been purchased at that time, or earlier. While you are living in the home owned by the trust you nominate the property outside of the trust to be your “primary residence” for tax purposes. You are allowed to keep it that way for six years. Before the six years is up, if you want to keep that property outside the trust as your primary residence you would need to genuinely move back into it for several months, then you can move back into the property in the trust and the clock is reset for another six years. It’s a bit complicated, but it can be done.
The reason for maximising debt on the property outside of the family trust is that with a lot of debt it will be a much smaller “carrot” for creditors to chase, plus when it becomes an investment property you would like to maximise the tax deduction related to it. The trust cannot distribute losses.
A reason for owning a property outside of the trust is so that you can gain the benefit of the tax free threshold on property tax. This will give you a similar benefit to not having to pay property tax on your home if it was outside the trust.
As your thoughts begin to crystallise you should seek professional advice from a tax accountant and/or lawyer. There are lot of little intricacies in a matter like this that cannot be covered in a brief article. But hopefully we have got the wheels turning for you so that you can have a profitable discussion.
Self-employed & small business solutions
Once you work out how to own it, State Custodians Mortgage Company is the place to come to get the loans that you will need to make it all happen. Whether you are self-employed or the owner of a significant small business, we understand the needs and are familiar with the solutions. We also have a great variety of loan products to suit small business owners in a variety of situations, including low doc home loans. Give us a call on 13 72 62 as soon as you are ready to get the ball rolling.