Commercial Property Tax Benefits

Commercial property investment is becoming increasingly popular with savvy investors looking to create, build, and strengthen their portfolio. However, understanding Australia’s tax system and the tax benefits you may be able to get from an investment property is crucial and, in many cases, will determine whether or not commercial property investment is the right choice for you.

Today, we’re going to explore commercial investment property tax benefits in more detail. We’ll cover everything you need to know in a simplistic way, helping to make things as clear as possible and pinpoint exactly what tax benefits you can expect when investing in commercial property.

What Tax Benefits Come With a Commercial Property Investment?

Investing in commercial property in Australia offers several tax benefits that can significantly impact an investor’s financial position. Let’s take a look at each of these in more detail below:

Tax Depreciation Schedules

When you invest in a commercial property, you’re able to claim tax deductions for the depreciation of the building’s structure, as well as its fixtures and fittings. These depreciation deductions are usually claimed through capital works depreciation deductions and depreciation on plant and equipment assets, resulting in considerable tax advantages.

Negative Gearing

In some cases, certain expenses (such as loan interest and maintenance costs) may exceed the income generated from the property, and if this happens, you can offset the net loss you’ve suffered against other taxable income. This is known as ‘negative gearing’, and doing this has the potential to reduce tax liability by reducing the legally recognised owner’s overall taxable income.

Goods and Services Tax (GST)

Often, a commercial investment property is sold as a ‘going concern’, and in these cases, you may be exempt from paying Goods and Services Tax (GST). This reduces not only the tax liability for the buyer but the seller too, making a commercial property investment of this nature a lot more desirable.

Land Tax

Another of the tax benefits you may benefit from when you purchase an investment property is land tax deductions. This is because some states and territories in Australia have thresholds for land tax, and this means that if the cumulative value of your land holding falls beneath the threshold, you might be exempt from paying land tax altogether, or you may receive a discounted rate.

Capital Gains Tax (CGT) Concessions

You may also be eligible for a Capital Gains Tax (CGT) discount upon selling your investment property if you have held it for more than 12 months. As with most tax benefits, this is subject to change over time, but, at present, you can receive up to a 50% discount on the capital gain made upon the sale of the property.

Costs of Borrowing (Loan Interest)

There are also quite a few tax benefits associated with the cost of borrowing, most of which are focused on interest expenses. One of these is interest deductions, which essentially allow any interest paid on loans used for purchasing, renovating, or improving a commercial property tax deductible.

Similarly, the expenses incurred in arranging a loan, including loan establishment fees, legal costs, and ongoing management fees, may be tax deductible over the loan’s period or, in some cases, immediately deductible.

An additional tax benefit is prepaid interest deductions. This means that any interest prepaid on loans up to 12 months in advance qualifies for an immediate deduction in the year of payment, potentially optimising deductions in a given financial year in the process.

Lease Incentives

You may also be able to claim certain tax benefits if you offer lease incentives to your tenants. The first of these is a Capital Works Deduction, which an investor may be eligible for if the lease incentive provided by the landlord involves structural changes or improvements to the property. This is usually claimed over a long period of time, typically at a rate of 2.5% per year over 40 years.

Lease incentives themselves can also be tax deductible, as providing them for your tenants is often considered a cost. Better yet, they continue to be deductible over the term of the lease, which means that you may be able to claim a tax deduction gradually rather than all at once.

Capital Allowances

This is one of the most important areas to pay attention to, as capital allowances provide significant tax benefits and allow property investors to claim deductions on the decline in value of certain assets within the property. This is outlined in two categories by the Australian Taxation Office: Division 40 and Division 43.

Division 40: Plant and Equipment

There are three main points to focus on within Division 40: Depreciating Assets, Claimable Depreciation, and the Quantity Surveyor’s Report.

Depreciating assets relate to items within the property that have a limited effective life and can decline in value over time, including items such as air conditioners, carpets, and lifts.

This relates directly to ‘Claimable Depreciation’ and allows an investor to claim depreciation deductions for these assets based on their effective life and depreciation rates. This has the potential to lead to huge tax savings, as a portion of the cost of these assets is deducted annually.

To claim these deductions accurately, you’ll need to obtain a Quantity Surveyor’s Report. This will detail all depreciable items and their respective depreciation values, ensuring the maximum allowable deductions.

Division 43: Capital Works

We’ve touched on Capital Works throughout this guide, but in terms of Capital Allowances, it falls into two categories – Building Depreciation and Annual Deductions.

Building depreciation allows you to claim deductions for the decline in value of the building’s structure over time and includes money spent on construction costs and related expenses pertaining to structural improvements.

These ‘Annual Deductions’ are typically claimed at 2.5% per year for a commercial property constructed after 1987, although an older property may have a different rate.

Remember, we’re here to help you at every stage of the journey when it comes to commercial property tax benefits. Contact us for a 15-minute no-obligation call, and we’ll answer all of your questions and look at your next potential steps.

Need Help With Your Commercial Property? Book a Free Call with an Experienced Commercial Buyer Agent

We know that commercial property investment, and everything that comes with it, can be tricky to navigate. So, why not let us do the hard work for you? Contact Revolve Commercial today and speak to one of our experts.