Tax time considerations for commercial property owners

With the end of another financial year behind us, we ask a tax specialist about the implications for commercial property owners and tenants.

If your business has leased its first commercial premises this financial year or you’re a first-time investor in commercial property, you’ll need to be aware of some key differences you can expect to see.

Commercial property owners

Before buying any commercial property, investors should consider the type of holding structure they plan to use, as this can have a significant impact on tax liabilities.

For example, commercial property is one type of asset that self-managed super funds can hold which can give you a good tax perspective, since super funds tend to pay less tax.

Other tax considerations arise during the management and sale of commercial properties.

Once you actually own it, have a look at obtaining a quantity surveyor’s report to provide a list of assets for depreciation to accentuate some of your deductions.

When selling a commercial property, for tax purposes the date of the capital gain is exchange, not settlement. As such, it is often good to wait until 1 July to push back into another tax year. Also, GST is an ongoing concern – if a commercial property is fully tenanted, you can effectively avoid paying GST when selling or buying.

Commercial tenants

There can be a different tax outcome whether the assets are owned by the tenant as opposed to the landlord. If they are getting, say, $100,000 worth of fit-out supplied by the landlord, they would have to pay tax on that as a non-cash incentive and then deduct the benefit.

Also, think about the end of the lease – while not specifically relating to tax, it can cause a bit of trouble if not thought out well in advance.

Common tax mistakes

Three of the most common mistakes relating to commercial property taxation are as follows:

  • Pre-payment of the rent before June 30 will most likely not get you an extra deduction because of the way tax is structured.
  • A common misconception of commercial property compared to residential is the GST. Rent for commercial property is usually subject to GST (over $75,000 per annum).
  • As an owner, you can claim certain capital works deductions for construction costs on an ongoing basis. However, when you sell it, you have to reduce the cost base by the amount of deductions you claim throughout the period of ownership (to avoid double dipping).

The Australian Tax Office website also outlines the various tax implications for commercial property tenants and owners.

Documentation is key

When it comes to tax time “documentation, documentation, documentation”.

This should include the rental agreement as a means of establishing rental payments and outgoings, a quantity surveyor’s report, documentation outlining any loans or debts held against a property, as well as receipts for deductions.

There is a fine line between repairs and maintenance which is immediately deductible, and capital improvements which are a long-term depreciation deduction. You need invoices which clearly outline exactly what work was carried out.

Also, communicate with your accountant in advance to see what you will need, map out what you are going to do in the financial year ahead, and know what you are heading into and what documentation you will be required to hold in order to substantiate all your deductions.

 

Tax time needn’t be a hassle, provided the required documentation is collated and filed throughout the year. Be sure to familiarise yourself with your tax responsibilities before you sign on the dotted line, rather than await a nasty tax bill.