Commercial Depreciation and Capital Gains Tax

Capital Gains Tax (CGT) is one of the more complex areas of tax legislation.

WHILE MOST INVESTORS just imagine a large tax bill, it isn’t a ‘one size fits all’ result for every business and commercial property owner. 

So, let’s perhaps explore this in a little more detail.

What is CGT and how does it work for Commercial Property? 

When an income-producing asset is sold, it’s usually sold at a loss or profit. When a profit (capital gain) is made, it may be subject to CGT. 

Property is usually the first thing that comes to mind when discussing CGT. But for businesses and commercial property owners, this can apply to any asset used to produce income. 

Several factors can impact how much CGT is payable following a sale. An accountant must apply ‘CGT events’ based on each scenario. 

What Tax Rate Applies for CGT? 

The tax rate of CGT is 30% for net capital gains for a company-owned asset, and 27.5% for a ‘base rate entity’ owned asset. If the commercial asset is held by a self-managed super fund (SMSF) in the accumulation phase, a 15% tax rate is applied. 

If a commercial asset was owned for more than 12 months, CGT can be discounted for some entities.

An SMSF can claim a CGT discount of 33%, while the full 50% CGT discount is available to assets owned by members of a trust or individuals.

Small Business CGT Discounts 

Further CGT discounts are available to small business entities that satisfy the Australian Taxation Office’s basic conditions which include meeting four key steps. 

Once these conditions are met, the business has access to several lucrative CGT discounts or full exemptions.

These include the 15-year exemption, 50% active asset reduction, the retirement exemption, and rollover. 

How does Commercial Depreciation Impact CGT? 

A key determining factor of calculating payable CGT is the asset’s cost base. 

This cost base is fundamentally what the owner paid to acquire the asset and includes factors like stamp duty, conveyancing fees, and the initial pest inspection.

The difference between the cost base and the price the property sold for is the starting point to calculating how much CGT is payable. 

Property depreciation is the natural wear of a building’s structure and its assets over time. Capital works deductions are claimed on the building’s structure and fixed assets. These do reduce the property’s cost base and can therefore impact payable CGT. 

Bottom Line: This doesn’t mean a commercial property owner should rule out claiming depreciation just because it means they may get a bigger CGT bill. The benefits depreciation supplies to their cash flow over their ownership period far outweigh the potential increase in CGT. 

Comments

  1. Vance Marcollo says

    I am more worried about the land tax and you it is skewed
    to prevent property ownership.
    It seems like a communist thing of social engineering.
    I suspect that it is causing a lot of wealth to be hidden in tax havens.
    The politicians won’t notice it until most of it’s gone.

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