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How much CGT will I pay on a commercial property investment?

29 January, 2020
Categories: Commercial, Investments, Tax

A common question we get as a commercial property investment provider is how much tax is payable on the sale of the property. Capital Gains Tax (CGT) can be a headache, so here’s an example and an insight to help investors know their tax obligations at the end of their investment.

Let’s face it, Capital Gains Tax (CGT) can put a dampener on your profits. All that hard work you’ve done, risk you’ve mitigated and tenants you’ve kept smiling, rewarded with a tariff from the Australian Tax Office (ATO).

Smart investing can mean more money in your pocket at the end of the day. And for commercial property investment, that requires an understanding of what capital gains tax means for commercial property.

Investors like to get right to the point, and that is to know how much they’ll be forking out to the ATO.

Capital Gains Tax example:

How much CGT will I pay on a commercial property investment?

Let’s have a look at how much one investor might have to pay on the sale of their commercial property investment if they had purchased the investment via a unit trust structure such as ours.

[By the way… This is a very broad example and does not constitute advice. We are not accountants, tax advisors or agents; we are very experienced property investors. For more information on CGT calculations on your specific investment scenario, talk to your financial adviser or accountant.]

Investor type: Individual (individual tax rate: assumed 37% for the purpose of this example)

Purchase price: $10,000,000

Sale price: $13,000,000

Cost base: $10,400,000 (includes $400,000 in costs)

Capital gain: $2,600,000

Investment lifetime: 3 years

Share of the investment: 1.00% (100,000 units/$100,000)

Prima facie, the investor would be looking at tax on their capital gains of about $9,620.

This was calculated by taking their share of the capital gain ($26,000) and applying their marginal tax rate (37% x $26,000) = $9,620.

If the investor had only held the property investment for less than 12 months or was in the business of regularly selling commercial property, this would essentially be their outcome.

In the property game, it’s usually a longer-term play. In this case, the investor held the property for three years and are not in the business of regularly selling properties for a gain. So, they may be eligible for a CGT discount.

CGT discount method

The discount method lets you reduce your CGT obligations by 50% for individual Australia residents and trusts and by 33.3% for complying superannuation funds.

That means our investor’s tax on the capital gain would reduce from $9,620 to $4,810 (i.e. 50 per cent). That is much more palatable.

This discount is usually available to our investors, as we have long-term value-add property strategies, and are not in the business of quickly buying and selling properties for a capital gain. Instead, we enjoy the yield which they generate.

Indexation method (if purchased before 21 September 1999)

If you purchased your commercial asset before the turn of the century, you can use the indexation method.

But as this is unlikely to apply to anyone reading the post, it’s not worth going into here. Head to the ATO website for more information on the indexation method.

Want to reduce your CGT? Increase your cost base

Anyone who’s sold a commercial property will realise the importance of the cost base.

The higher the cost base, the lower your payable capital gains tax.

So, hold on to those receipts. Keep record of every expense relating to the purchase, holding and sale of your property. It may jump on the back of your cost base and end up putting more money in your pocket.

It helps to have experience on your side when you’re investing in commercial property. Our team of property and property finance professionals can help with any query you throw at them.

For more information on how to invest in commercial property, get in touch with us.

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