As the saying goes, nothing in this world can be certain, except death and taxes. While we can’t do much about the first, we can help you to navigate the second with ease.
So, what taxes do you need to pay on a commercial property? The short answer is that it depends on who is paying them.
In each instance, investors are liable for income tax, capital gains tax and GST. However, as the laws and government concessions vary depending on the entity that owns the property, we will break down the different commercial property investment scenarios for you.
Individuals
Income Tax
If you have invested in commercial property as an individual, your income from this property will be included in your income tax assessment and taxed at your applicable personal income tax rate. In the case of a property with multiple owners, each owner will pay tax for the proportion of the rental income equal to the percentage of their stake in the business, at their individual income tax rate.
You would have heard the term negative gearing bandied about – this is where it comes into play. You can claim expenses such as depreciation on both capital works, plant and equipment, management and maintenance, and renovations to reduce your overall tax burden.
Capital Gains Tax
If you have sold commercial property, the capital gains from that transaction will also be added to your assessable income and taxed at the same rate. But fear not! As long as you have owned the property for more than 12 months, individuals get a 50% discount.
Goods and Services Tax
Finally, individual property owners need to pay goods and services tax or GST on the sale price of the property, as with any other product or service. Sick of all these taxes and wondering what you can do to minimise them? A few quick pointers to minimise GST include:
- Claim GST credits on purchases that relate to selling the property to offset this cost.
- Check whether you are eligible for the margin scheme and enter a written agreement with the purchaser to sell under the margin scheme before the settlement date.
- Sell the business as a GST-free sale of a going concern. To do this, you must draw up a written agreement with the purchaser to this effect, supply everything required for the ongoing operation of the business, negotiate payment for that supply, and ensure that the purchaser is registered for GST (or is required to do so).
Self-Managed Super Funds
Income Tax
Commercial property investments are understandably popular with SMSFs – they deliver higher rental yields than residential properties and generally carry much longer-term lease options. An SMSF pays a low rate of 15% tax on rental income. Once the fund moves into the pension phase, this rate becomes nil.
So what about negative gearing I hear you ask? It is still applicable to properties under the banner of SMSF. However, because the deductions from expenses apply to the already low 15% rental income tax, there is a lower level of benefit compared to an individual who is negative gearing their property.
Capital Gains Tax
SMSFs are also required to pay tax on any capital gains that occur during the accumulation phase. However, as with a property owned by an individual, as long as you have held the property for more than 12 months, you’ll be eligible for a discount – this time of 33%. During the pension phase of an SMSF, you are eligible for a complete capital gains exemption.
Goods and Services Tax
Lastly, if your SMSF has an annual turnover above $75,000 and owns commercial property, you must be registered for GST and pay GST on the sale price. You can claim GST credits for costs that relate to buying the property, such as solicitors fees.
Companies
Income Tax
When a company owns a commercial property, it pays tax on the property’s net rental income at its current corporate tax rate. This rate is generally 30% unless the company is a base rate entity, in which case a tax rate of 27.5% applies.
Capitals Gains Tax
Your business’ current corporate tax rate, be that 30% or 27.5%, also applies to capital gains tax. Discounts and exemptions are generally not available to larger businesses.
However, if you run a small business with an aggregated annual turnover below $2 million, net company assets of no more than $6 million, and are using the commercial building in connection with your business, you may be eligible for a Small Business CGT Concession. The four exemption categories are as follows:
- Retirement exemption – capital gains from the sale of active commercial properties are exempt up a lifetime limit of $500,000. This amount must be paid into a retirement savings account or compliant superannuation fund if you are under 55.
- 15-year exemption – if your company has owned the property for 15 years+, you are aged 55 years or older and are retiring or unable to work, you are exempt from capital gains.
- 50% active asset reduction – if you satisfy the basic conditions for small business CGT concessions, you can access a 50% discount on an active commercial property. This reduction may apply in addition to the 50% discount if you have owned the building for 12 months or more.
- Rollover – rather than choosing the retirement exemption, you can find a replacement asset to use for your business. You can then defer all or part of your capital gain for two years.
If eligible, you can apply multiple concessions until your capital gains tax reaches 0%. Speak to the ATO to determine the order and conditions surrounding these concessions to make sure you maximise your income potential.
Goods and Services Tax
Similar to SMSF and individuals, companies are liable for goods and services tax on the sale of commercial properties. You can offset this cost with expenses incurred in the sale of the property.
Calculating taxes can be complex, so it is always worth getting some expert advice. The professional, experienced team at MCO are on hand to make the process as pain-free as possible and ensure that you can leverage your investment for maximum return. Call us today to find out how we can help you get the most value from your commercial property.