Commercial real estate and capital gains tax: understand how it works

Office towers, cattle farms and your favourite café are just some of the things you’ll find in the Australian commercial real estate market. There’s no doubting that the market is unique with many different types of properties. One thing that all commercial owners have in common is that capital gains tax (CGT) can apply when they sell their property.

What is CGT?

The principle of CGT is the same for all types of investments.

CGT is the tax you pay on the profit made from a sale. The profit is a capital gain and is the difference between what you paid for the property including the transaction costs (your cost base) and what you sold it for.

Three commercial CGT facts

CGT is very complex and many factors come into play when it’s calculated. Here are some unique factors of how CGT is applied for commercial property.

1. Rates of CGT - The rates of CGT change depending on who owns the asset. A 30 per cent CGT rate is applied to any net capital gains for company owned assets, unless the company is a base rate entity where a lower rate of 27.5 per cent is available. Whereas, when the asset is owned by a Self-Managed Super Fund (SMSF) that is in the accumulation phase, a concessional rate of 15 per cent is used. For individuals, the CGT rate is the same as their income tax rate for that financial year.
2. Available CGT discounts - CGT discounts are available for income-producing assets owned for more than 12 months. There are no 12 month discounts available for commercial assets owned by companies. SMSF’s can claim a 33 per cent CGT discount. While the full 50 per cent CGT discount is available for commercial assets owned by members of a trust or individuals.
3. Owner-occupied exemption - Unlike residential investment properties, owner-occupied commercial properties are not exempt from CGT.

Small business and CGT

Not all commercial property is the same, and the Australian Taxation Office (ATO) have further CGT concessions in place for small businesses.

15-year exemption: If the small business has owned an active asset for 15 years and the owner is aged 55 or over, are retiring or permanently incapacitated, any capital gain is exempt from CGT.

50 per cent active asset reduction: Small businesses can reduce the capital gain on an active asset by 50 per cent. If eligible, this can be applied in addition to the 50 per cent CGT discount when the asset is held for more than 12 months.

Retirement exemption: Overall, capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If the small business owner is under 55, the exempt amount must be paid into an appropriate super fund or a retirement savings account.

Rollover: When selling an active asset, the small business can defer all or part of a capital gain for two years or longer if; they acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.

Are all small businesses able to use the concessions?

There’s basic eligibility and conditions that a small business must meet to be able to access the CGT concessions.

Some of the key things the ATO looks for when determining if a small business is eligible includes the annual turnover of the business, how the asset was used by the business, and the total amount of net assets that the small business owns.

Overall, CGT is very complex and its always recommended to discuss your questions surrounding CGT with a trusted accountant.

Source - BMT Quantity Surveyors