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News Bulletin : ADA News Bulletin August 2010
32 AUGUST 2010 Many dentists often want to purchase their practice premises (freehold). In fact, sometimes they are encouraged to do so by their accountant or advisors. Often, it's suggested that they buy the dental surgery in their super fund and rent it back to their practice. Whilst this is often the 'norm', does it make sense? Are you better off to own your practice or lease it? COMMON CONSIDERATIONS There are many reasons why, from a business perspective, it would be better to own your dental surgery. Some of these might include: • If you spend a lot of money on a fit-out, you would like to know that you'll be able to enjoy it for many years to come without any interference from a landlord. If you're leasing a premise, you might be forced into relocating (maybe due to lease costs becoming prohibitive) and therefore 'wasting' some of the fit-out costs. If you own the premises, you have more control. • You might increase the value of your practice by owning the premises. This might appeal to a potential purchaser, because it sometimes provides more certainty over the profitability of the practice. In addition, the location of the practice might carry a level of goodwill -- maybe because the location is very well- known (been established for many years). • Rent money is dead money -- or so the saying goes. Some people are concerned that by leasing a premises and paying someone rent, they are lining an investor's pockets at the expense of their own wealth. In some situations this might be true -- but maybe not in every situation. BUSINESS VERSUS PERSONAL The conflict you face is weighing up what is best for you personally (from a wealth accumulation perspective) compared to what is best for your practice. This may be of particular importance if you are using a self-managed super fund (SMSF), as the trustee of the fund must make investment decisions that will maximize the members' retirement savings, which may actually conflict with what's best for the member's dental practice. This gets to the core of the reason I'm writing this article. I want you to think hard about whether it's a good decision to own your practice from a wealth perspective. IFYOUDOOWNIT The one thing I won't disagree with is, if you are going to own your practice premises, then it's more than likely you'll be better off owning it in a SMSF. Over the past few years, it has become even more attractive with the introduction of borrowing rules (which allows super funds to borrow to buy property). The advantage of owning the surgery in super is accentuated with the current government trying to limit the tax breaks that were available to high income earners through tax deductible super contributions (now limited to $25,000 per annum if you're less than 50 years old). Owning a surgery in your SMSF allows you to get more money into super. Notwithstanding, you'll benefit from a concessional tax environment that might see you pay nil capital gains tax if you sell the surgery after retirement. THE COMPARISON I thought it would be interesting to compare two scenarios that involved a surgery that wasn't investment-grade (investment- grade property is one that will provide a high capital growth rate and consequently a lower rental yield -- for example, retail commercial property can provide this return whereas industrial and lower-grade commercial property often provides the reverse -- high yield, low growth). That is, due to the surgery's limited capital growth prospects, it wouldn't make a good investment. Often, if a property has limited capital growth prospects, an investor will receive a higher rental yield as the 'market forces' will compensate the investor for a lower capital growth rate. I compared two scenarios: TOBUYORNOTTO BUY A DENTAL SURGERY that is the [big] question! Compiled by Stuart Wemyss business perspectives
ADA News Bulletin September 2010