Whenever you gain something out of selling your assets, you’ll have to pay and remit to the government what’s called a capital gains tax. For capital gains tax on commercial assets, the asset can be office buildings, cattle farms, or stand-alone buildings. These are just some examples in the Australian commercial real estate market, but the asset can be any real property of commercial value.

There are a lot of other various kinds of commercial assets in the market, and you can perhaps think of a dozen other unique properties. But what all commercial properties have in common is that the owner can incur capital gains tax (CGT) when the property is sold. To give you more information about capital gains taxes, this article offers more helpful hints on how CGT affects commercial assets.

You’re Taxed For Gains From The Sale

The underlying principle of CGT is the same for all kinds of investments—the state imposes a tax on the money you gained from what you sold. CGT, in essence, is the tax paid for the profit you receive out of selling a piece of real estate. 

The state looks at the profit as a capital gain on your part. It represents the difference between the price when you bought the property and the property value when you sold it. There’s an underlying assumption that nobody would sell at a loss.

How CGT Affects Commercial Property

Computing the applicable capital gains tax is not as simple as its concept though. Several factors are considered to know how CGT will be applied to a specific commercial asset. Here are a few things you need to know on how CGT affects commercial property.

1. CGT Rates Applied

The applicable CGT rates vary. The rates depend on who owns the asset. For assets owned by a company, the CGT rate applied to any net capital gains from their sale is around 30%. The rate applied changes if the company is classified as a base rate entity; in which case the lower rate of 27.5% is applied.

However, when the asset is owned by what’s called a Self-Managed Super Fund (SMSF), which is already in the accumulation phase, then another rate called concessional rate is applied. The concessional rate to be applied is 15%. For commercial assets owned by individuals, the CGT rate applied is the same as the income tax rate imposed on them for the financial year covered by the transaction.

2. CGT Discounts

To spur economic activity and investments, the state sometimes grants tax cuts on capital gains taxes. The idea is that cuts and discounts will encourage business transactions. For Australian small businesses, commercial assets owned for a period of more than 12 months, which can be proved to be producing income, entitle the owner to avail of CGT discounts. 

Only commercial assets owned by members of a trust or by individuals can avail the full CGT discount, which is equivalent to 50%. Special funds like SMSFs can avail of CGT discounts up to 33%. However, the government doesn’t give any 12-month discounts for commercial assets owned by companies. 

3. Exemptions For Owner-Occupied Property

Residential investment properties are exempt from CGT, but owner-occupied commercial properties are not covered by the exemption of CGT. So, for instance, the residential house you bought as an investment is exempted from CGT. But if you have your own commercial or office building, or your own farm land used for commercial cattle farming, even if you’re the one occupying the building or the farm, it’s still not exempt from CGT when you sell.

CGT Applied To Small Businesses

The Australian Taxation Office (ATO) grants a few more concessions to small businesses in the application of CGT. The ATO doesn’t treat all commercial properties owned by various different users in the same way.

1. 15-year Exemption 

If the owner of the small business is already aged 55 years or more and plans to retire or is already permanently incapacitated, any active commercial asset owned by the small business for at least 15 years is exempt from the CGT if the owner does sell such commercial asset.

2. 50 Percent Active Asset Reduction 

Even for those active commercial assets, which have not yet been owned by the small business for the good part of 15 years, they can still ask for reduction.  Small businesses can have a capital gain reduction of 50% on any active asset. This can be applied on top of the 50% CGT discount applied for commercial assets held by the small business for a period of more than 12 months if the small business is eligible.

3. Retirement Exemption

There’s another exemption, which is good for those planning for their retirement. Overall, when active commercial assets are sold, any net capital gains from the sale are exempt. The lifetime limit is up to AU$500,000. If the owner of the small business has not yet reached the age of 55, they’ll be required to pay the exempt amount into a retirement savings account or a suitable super fund.

Final Words

To be able to avail of the CGT concessions, a small business must be able to meet certain basic conditions and eligibility requirements. Some of the things that the ATO looks into are the annual business turnover, how the business made use of the commercial asset, and the net assets owned by the small business computed as a total amount.