Capital gains tax: what it means for commercial property
Capital gains tax is an issue for anyone involved in the commercial property market.
Whether you are buying a home for your start-up, expanding your business or selling an investment, CGT is something you will encounter.
We asked Mark Chapman, Head of Tax with Taxpayers Australia, how CGT affects the owners of commercial property.
“When you dispose of a commercial property, the chances are that the disposal will be subject to capital gains tax,” Chapman says.
“Put simply, this is the tax you pay on the difference between the amount you sell a property for and the amount you paid for it. CGT isn’t a separate tax, it’s part of your income tax liability.”
Chapman says there are various events that can trigger a CGT liability.
“The most common is the disposal by sale of your commercial property but other events which could give rise to a capital gain include the loss or destruction of the property (in a fire perhaps), the gifting of the property to someone else or a deemed disposal caused by the owner of the property ceasing to be Australian resident.”
The capital gain is worked out by taking the gross sale proceeds and deducting the cost base.
“The cost base is the sum of the original cost of acquiring the property plus any incidental costs, costs of ownership, improvement costs and title costs,” Chapman says.
“If the sale proceeds are greater than the cost base, the difference is a capital gain. If the sale proceeds are less than the cost base, the difference is a capital loss. Any capital losses can be offset against capital gains incurred in the same year on other disposals or, if there are insufficient or no such capital gains, the capital losses can be rolled forward to offset against capital gains of future years. Capital losses can’t be offset against other forms of taxable income.”
We also asked Chapman what business owners should be aware of, regarding capital gains tax, when they buy or sell commercial property.
“Business owners should always build potential tax liabilities into their planning when they are looking to acquire commercial property,” he says.
“In particular, they should keep records of all transactions which could affect a future capital gain or loss so that they are able to work out their ultimate tax position on disposal and also verify that position to the ATO.
Chapman says if selling at a profit, you should expect to have to pay part of that profit in CGT unless you have capital losses brought forward from earlier years.
There are things business owners can do to reduce the amount of CGT they pay.
“Provided the property has been held for more than 12 months, the amount of a capital gain can be discounted by 50% for individuals and trusts or by 33 1/3% for certain superannuation funds,” Chapman says.
“The CGT discount is not available where the capital gain is incurred by a company.
“If the property was acquired before 20 September 1985 (when CGT was introduced), there would not generally be a CGT liability (subject to certain integrity rules).”
Chapman says CGT can be a very complex subject. This article gives only a basic overview. For more detailed advice and planning, consult an experienced tax professional.
Read more about capital gains tax concessions for commercial property.