BRISBANEDamien Windle 07 3252 2219damien@pcsfinance.com.au

GOLD COASTSteve Burton 07 5580 9595

steve@pcsfinance.com.au

enquiries@pcsfinance.com.au

www.pcsfinance.com.au

Established since 1995, most experienced MLR finance broker, with over 20 years as the leading management rights finance broker…

(Sunshine Coast o�ice coming soon)

Copyright 2015 Resort Publishing • Phone 07 5440 5322 RESORT NEWS - NOVEMBER 2015

TIPS FOR FINANCE

Turning a negative situation into a positive outcome

L I F T - O U T I N F O R M A T I O N F E A T U R E

We are faced with challenges every day and the level of challenge is measured differently depending on one’s life experience, personality, attitude, motivation, etc.

We have been sourcing fi nance for clients since 1995 and we could write a book on the changes we have experienced in the management and letting rights industry and banking industry in this time.

The latest challenge thrown at us was the recent Vie Management P/L (receivers and managers appointed), (in liquidation) v Body Corporate for Gallery Vie CTS 37760 [2015] QCAT 164.

In short, the outcome of this case has caused some lenders to amend their lending policy for management and letting rights. Like any change, some people immediately think worst case and the negative thoughts come into play. It’s important to understand all the facts and the reasons behind the outcome of this case, and the question arises, what are the chances of this occurring again?

While some banks have taken the conservative approach and tightened up their lending policy, others are continuing to approve loans as “business as usual”.

A skilled fi nance broker will assist in navigating the various policies and arranging the most suitable lending option for your situation.

On a positive note, one bank in particular is seeing this as an opportunity to grow their management rights lending book. Loans are still being approved although the process takes a little longer, so allow 35 days for fi nance when signing a contract.

For vendors we also suggest to speak to your lawyer about the pros and cons of amending your MLR agreements to prepare for sale as the banks may insist on changes.

The Gallery Vie case isn’t the only reason why some banks are tightening up their credit policy.

Lending to inexperienced people with poor communication skills, will no doubt result in incompetent business management. When inexperienced bankers and

fi nance brokers try to win every deal regardless of the borrowers experience, it’s a given, some loans will end up in default. When a bank’s credit risk department take a broad brush approach to policy it affects everyone in the end.

The banks will always review their lending policy from time to time and the Galley Vie case was an opportunity for the banks to do exactly that.

Whatever the scenario, we look at each one individually, and take the time to assess a person’s fi nancial position so they have confi dence that fi nance is pre-qualifi ed before making an offer. If we believe we cannot help someone, we give them an honest answer. There is no point trying to help someone just for the sake of getting a loan approved as the process is more complex than this and it’s critical to act professionally and lend responsibly.

Clients contact us every day to talk about the bank’s lending guidelines and the simple answer is, the banks are still lending. We do need to look at each scenario on a case-by-case basis and those who are experienced management rights operators (or related industry) maybe offered more fl exibility by the banks.

We know banks are still lending and in our opinion will continue to do so.

We have been informed that ARAMA are working diligently

with the Queensland government to tighten up legislation in order to avoid the ‘Gallery Vie’ incident happening again, however in the meantime, we will continue to help clients source fi nance.

At times of uncertainty, the role of a fi nance broker is even more important as clients tend to receive half of the information when dealing directly with the banks. We are at the coal face, continually educating ourselves with the banks credit policy and preparing ourselves to deal with change.

As I mentioned earlier, there have been other things that have challenged us e.g. GFC, regulating fi nance broking industry, new banks and fi nance brokers entering the management rights industry, interest rate rises,

changes in bank policy, etc. However, we continue to listen and help our clients achieve their goal of buying a management rights business.

When looking for a fi nance broker to guide you through the lending process consider a long-serving company that concentrates on one industry – management and letting rights.

We don’t pretend to know everything about various industries and this approach allows us not to get distracted.

“We have survived what’s been thrown at us and continue to fi nd alternatives for our clients”

By Damien Windle and Steve Burton, PCS Finance

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Accounting and taxation aspects of financing management rights

Financing costs are a significant expense in the operations of a management rights business so it is important they are structured correctly to maximise the potential taxation benefits.

Here are a few tips to help ensure you optimise those taxation benefits.

Good and bad debt!When looking at the various loan options on offer for a purchase of a management rights business most people would assume that the loan with the cheapest interest rate and fees is the best loan. That is a reasonable presumption and would be true if you were taking out a normal home loan to buy your residence and tax deductibility of interest was not an issue.

However once you are borrowing to buy a business asset or investment, the tax deductibility of the interest on that loan becomes an important factor. Any loan upon which the interest is not tax deductible (such as a home loan, credit card or personal loan) is what we call “bad debt” as the interest on those loans is not tax deductible. Conversely loans upon which the interest is tax deductible are “good debt”.

For instance, a non-tax deductible loan with a 5 per cent interest rate will actually cost you more than a tax deductible loan at 7 per cent - sounds strange, but it is all to do with the tax deductibility of the interest! One of the key tax planning strategies in any business is to eliminate any “bad debt” and only have “good debt”.

Structure of borrowingsWhen purchasing a management rights business there are two assets acquired, the managers unit and the business.

The managers unit is generally treated as the manager’s principal place of residence, which means the interest on any loans to acquire this unit will not be tax deductible (just like a normal home mortgage).

The management rights business is as the name says ‘a business’ and therefore the interest on any loans to acquire this asset will be tax deductible.

A lender will want to take security over both assets in financing the

purchase of the business. The subtlety and what determines the tax deductibility of interest on a loan is how the loans are structured. Take at a look at the following two scenarios It is not uncommon for a lender to propose two loans:

• A home loan over the manager’s unit (usually the lowest rate loan); and

• A second loan over the business

Scenario 1 below looks attractive on the surface as most of the borrowings are against the unit, and the home loan will have the lowest interest rate.

However from a taxation perspective this is the worst possible scenario as the interest

on the home loan will not be tax deductible.

The only interest that will be tax deductible will be on the business loan, but this loan represents less than half the borrowings for the business.

Contrast this with scenario 2 where all the borrowings are against the business with the unit merely being used as part security for the business borrowings. The way this has been structured from a

once you are borrowing to buy a business asset or investment, the

tax deductibility of the interest on that loan becomes an important factor

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taxation perspective is that the purchaser has used their cash equity to purchase the unit with the balance of funds applied towards the business. The bank borrowings are therefore specifi cally applied towards completing the business purchase with both assets used as security. This is the most tax effective way to structure your borrowings.

This process is made easier if there are different entities purchasing the manager’s unit and management rights business, which is fairly common particularly in medium – large buildings.

In this case all borrowings should be in the name of the entity purchasing the management rights business.

Principal repayments on loans – how much?There are two components in any loan repayment, interest and principal repayments. Most fi nanciers will generally require some level of principal repayments on a loan,

though the amount can vary substantially. The fi rst thing to keep in mind is that it is only the interest on a loan that is tax deductible.

Any amounts you pay off the principal of a loan are not tax deductible, which means this amount is coming out of the after tax profi ts of the business.

If the principal repayments are too high, it can severely curtail the cash fl ow of the business and leave the manager with limited funds.

Let’s take the following example to explain the issue:

• Business profi t of $200,000, multiple of fi ve times, so purchase price of $1,000,000

• Managers cash equity towards purchase of $300,000

• Two bank loans of $350,000 each; total $700,000

• Interest rates are 6 per cent

• Business is in a company, fl at tax rate of 30 per cent

• Bank 1 will allow interest only on the fi rst loan but P&I over 10 years on the 2nd loan

• Bank 2 requires P&I on both loans over 10 years

As you can see the differences in principal repayments between the two loan options makes a signifi cant difference to the manager’s net income.

Debt reduction is important in any loan structure and should be encouraged; however it has to be at a manageable level. You need to carefully consider the loan payment amounts in assessing any fi nance proposal, don’t just look at the interest rate.

By David Jackson, Hospitality & Strata

info@hostrata.com.auwww.hostrata.com.au

Specialist Advisers to the Accommodation & Hospitality Industry

Audits – Taxation – Feasibilities – Due Diligence Reports

07 5574 0922

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Experienced legal advisors for anyone buying or selling an accommodation business.Contact Hillhouse Burrough McKeown today.

Level 7, 102 Adelaide Street, Brisbane QLD 4000GPO Box 1709 Brisbane QLD 4001T: (07) 3220 1144 E: email@hillhouse.com.au

www.hillhouse.com.au

Buyers be ready

Now is as good a time as any to refl ect on what it means to transact with another party, and the need for a buyer to be ready as opposed to the old (and legal) adage of ‘buyer beware’ once under contract.

Industry practitioners I suspect would certainly agree that the path a transaction takes is not determined by the ability to reach contract, but by the judgment that is exercised while under contract in order to deliver the end product - a business. Of course, when two parties contract, it is not only the buyer that must be ready to deal with body corporate standards and the practicalities of the Gallery Vie decision, the seller has a part to play also.

Industry specialists understand the existing market parameters and until such time as the state

legislature tackles the situation, a move which our fi rm has supported and provided formal assistance, then we sit in this position until more lenders refi ne their policies. It is an absolute positive that representations are being made at all levels and plausible changes to the relevant statutory provision debated. In that regard, I expect that a practical resolution is close.

The state of the management rights industry at present is one that in this fi rm’s opinion, more than ever, requires a prospective manager to be ready both for the funding criteria initially, and subsequent body corporate expectations. Both of these considerations should have always sat foremost within the realms of thought when transacting and with the Gallery Vie development, the industry is served with a timely reminder about the importance of

being prepared to address both aspects. The funding landscape has changed, that is without question, however, deals are there to be done and similarly, but not as a direct result, requirements (not the standard) for body corporate consent has been elevated.

The latter has been particularly noticeable during this calendar year. The result is that there is a need for buyers to engage at an earlier stage with the procedural processes, which is a positive as well-advised buyers understand what is in front of them and there are no illusions. Buyers that understand and are ready for funding challenges will unquestionably be well equipped to handle body corporate consent requirements.

There is certainly nothing wrong with lenders being more sensitive about those parties to which they advance, which criteria we have seen has been highlighted as a result of Gallery Vie. All conversations about the appropriateness of a buyer to perform the duties specifi c to a complex are in the interests of every party concerned with the subject transaction; seller, buyer and body corporate. Suitability assessments are not unique to the management rights industry and meeting the criteria for consent or approval is integral irrespective of whether this involves a bank, body corporate, landlord or any other party in commerce that has a legal entitlement to exercise discretion.

With management rights, where the difference lies is that in

dealing with body corporates we have statutory intervention concerning the criteria that applies when a seller makes an application for body corporate consent. The interpretation of the statutory consent provisions is increasingly being applied in a way that requires a skillset for that specifi c scheme to be acquired by a manager and if necessary, further training may become the subject of negotiation. There is merit in this approach as it aligns with and benefi ts the interest of fi nanciers absolutely, provided body corporates do not lose sight of the fact it should have a discretionary application.

The overarching statutory concept of ‘reasonableness’ supports this view and buyers need to be ready for body corporates to exercise their own discretion when dealing with their complex.

The need for managers to understand that satisfying body corporate criteria is dictated by statute, that consent should not be taken for granted, and that we cannot assume that all body corporate attitudes are the same is clear. To a large extent, this is the same approach taken by the various fi nancial institutions at present.

The rule is to adopt a diligent attitude when articulating management credentials for body corporates as for fi nanciers and with that approach, the path ahead in a transaction will invariably be much easier.

By Peter Spranklin, Hillhouse Burrough McKeown Lawyers