Insights
The tax advantages of commercial property investment
Published
29 August, 2023
Australian real estate has always been an attractive option for investors, both domestic and foreign. And while residential properties grab most headlines, the potential benefits of investing in commercial property are finally getting the attention they deserve – particularly when it comes to tax advantages when investing.
If that floats your boat, you’re not alone. Tax time is either a time to fret over those big capital gains you made during the financial year or a time to finally get your own on the taxman, with some hefty deductions to reduce your tax obligations.
Here, we delve into some of the tax perks associated with owning commercial property in Australia.
Author’s note: Australian taxation laws are subject to change at any time. This is merely a blog post with general information and should not substitute for the advice of your tax professional or financial advisor. Always seek professional advice before making any investment or tax-related decisions.
1. Capital Gains Tax (CGT) discounts
A capital gain occurs when you sell an investment for a higher price than what you paid for it (inclusive of all relevant costs). That capital gain is added to your taxable income at tax time, in the form of capital gains tax (or CGT). In Australia, if an individual or trust holds a commercial property for more than 12 months, they may be entitled to a 50% CGT discount when they sell the property. This discount can reduce the tax payable on any capital gain achieved. Remember, however, the rules can be different for non-residents and corporate entities, so it’s important to seek advice relevant to your circumstances.
2. Depreciation
Commercial property owners can typically claim depreciation on both the building structure and the fixtures and fittings within it. This is one of the favourite tax-related perks of commercial property investors.
Building Allowance
This is the cost associated with the wear and tear of the building structure itself over time. Depending on when the building was constructed, investors might be able to claim between 2.5 per cent to 4 per cent per annum (see the ATO website or your tax professional for an accurate figure).
Plant and Equipment
These are assets within the building such as carpets, air conditioners, lifts and fire safety equipment. Depreciation on these items can often be claimed at a much higher rate.To maximise depreciation claims, it’s often wise to get a tax depreciation schedule prepared by a qualified quantity surveyor.
3. Negative gearing
Like residential property, commercial property can also be negatively geared. If the costs (like interest on loans and maintenance) of holding your commercial property exceed your rental income, you can offset this loss against other taxable income. This can be particularly useful for investors with significant other income sources, effectively reducing their overall taxable income. To note, however, is that commercial real estate – when the premises is occupied with a high-quality tenant – often provides very high yields, meaning rental income is known to exceed the costs of financing the investment.
4. GST credits
Owners of commercial properties may be eligible to claim Goods and Services Tax (GST) credits on related expenses. If you’re registered for GST, and the property is used in carrying on your own business, you can usually claim back the GST included in the purchase price, as well as on other related expenses like property management fees and repairs.
5. Self-Managed Super Funds (SMSFs)
More Australians are looking at commercial real estate as a potential investment for their SMSFs. When purchasing commercial property through an SMSF, investors can take advantage of the concessional tax rate of 15 per cent on rental income. Moreover, if the property is sold after the fund enters the pension phase, there may be no CGT payable.Most of our investors use an SMSF to invest in commercial property. There are plenty of reasons why – just check out our SMSF white paper to know more.
6. Land Tax Exemptions
And finally, in certain jurisdictions within Australia, commercial properties that are used for specific purposes might be eligible for land tax exemptions. This includes properties used for charitable, public or educational purposes.Commercial property in Australia offers numerous tax advantages that can enhance the overall returns on investment. But, like all investments, it’s important to do thorough research and seek advice from professionals such as tax accountants and property consultants. We can’t stress this enough.The tax landscape is also subject to change, and staying updated on current regulations and potential reforms can help investors navigate this dynamic environment more effectively. Those who do, can often be rewarded by strong cash flow, excellent potential for capital gains, and a lower tax bill than they might’ve thought possible as a successful investor.
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