How does capital gains tax differ in commercial property?

Capital gains tax is a major cost consideration for investors, but when it comes to commercial property, things can get complicated for the uninitiated.

Unlike owning your own home, investment properties are subject to capital gains tax (CGT). The tax does not have a one-size-fits-all approach – there are differences between various ownership structures for commercial properties.

So for anyone buying into the Australian commercial property market – whether they are a local investor diversifying their asset portfolio or a foreign investor seeking to capitalise on Australia’s solid economic structure – here is an overview of CGT rules and regulations:

What is CGT?

CGT is the tax levied on capital gains achieved on the sale of Australian investment assets, including property, purchased after 20 September, 1985.

There are three methods used to calculate CGT liabilities; the discount method, indexation method and ‘other’ method used to calculate properties held for less than 12 months.

As the National Australia Bank points out, companies are liable to pay CGT at the rate of 30 per cent of the capital gain.

The tax is not payable where a capital loss is realised. Instead, a capital loss can be used to offset gains on other assets in the same year.  If your capital losses exceed your gains in a given financial year, the loss can be carried forward to deduct from capital gains in future years.

CGT on commercial property

Essentially, CGT on commercial properties works in a similar way to residential properties. However, there are several key differences:

  • Unlike residential property where the family home is exempt from CGT, owner-occupied commercial property is not exempt from the tax. However, there are a number of discounts available for certain ownership and usage structures.
  • Companies are not eligible for the 50 per cent discount on assets held for more than 12 months.
  • There are particular discounts and offsets available for certain types of commercial property owners (outlined below).
  • Farms and home-based businesses are treated differently for tax purposes.

In addition to CGT, commercial property owners are also generally liable to pay the Goods and Services Tax (GST).

Discounts and offsets

Not every commercial property owner is subject to the same rate of CGT. Indeed, how much CGT you pay varies dramatically depending on your circumstances.

  • Individuals and trusts are eligible for a 50 per cent CGT discount on assets held for more than 12 months.
  • When selling their own premises, small businesses have the option of four different CGT concessions, including a 50 per cent discount, rollover or special exemption.

CGT is just one element of the tax implications for properties used to run a business. Speak to your tax accountant for tailored advice on your tax implications before taking on a commercial property investment or lease so you are not hit with unexpected tax liabilities at the end of the financial year.