Commercial Property: Should You Lease or Buy?

Leasing preserves capital for business operations and growth. Monthly rent is fully tax deductible as a business expense. Leasing provides flexibility to relocate as business needs change. There is no property maintenance responsibility (typically landlord obligation). Lower upfront costs mean faster business establishment. Leasing may suit businesses in growth phase or with uncertain space requirements.

Ownership builds equity that grows over time (historical appreciation of 3-5% p.a.). Interest and depreciation are tax deductible, plus building works write-offs. No rent increases or lease renewal uncertainty. Complete control over premises including modifications. Potential to lease surplus space to other tenants. Retirement asset that can provide rental income or be sold.

Compare total occupancy cost over 10 years including rent escalation (typically 3-4% p.a.), versus loan interest, rates, insurance, and maintenance for ownership. Factor in capital gains tax on eventual sale if buying. Consider opportunity cost of deposit tied up in property versus business investment. Model different growth scenarios to test each option.

Leasing: rent is fully deductible, no depreciation benefits, no capital gains exposure. Buying personally: interest deductible if leased to business, depreciation claimable, CGT applies on sale with 50% discount if held 12+ months. Buying through SMSF: builds super assets, rent from your business is deductible to business and taxed at 15% in SMSF, CGT-free if sold in pension phase.

Purchasing through your SMSF offers unique advantages. Rent payments become tax deductible to your business while building retirement assets. Rental income is taxed at just 15% in the accumulation phase. Capital gains are tax-free if sold during pension phase. However, this requires sufficient super balance and meets strict compliance requirements. See our SMSF Property Lending guide for details.

Startups and early-stage businesses typically suit leasing due to uncertainty about space needs and capital constraints. Established businesses with stable operations and strong cash flow are better positioned to buy. Consider your 5-10 year business trajectory. Buying ties you to a location, so ensure it suits long-term plans.

Create a detailed financial model comparing both scenarios over 10 years. Consider non-financial factors including flexibility, control, and long-term goals. Discuss with your accountant to understand specific tax implications. Assess your access to finance and deposit requirements. Consider whether capital is better deployed in the business or property. There is no universally right answer—it depends on your circumstances.