Finding practical ways to increase business’s capital is one of the main concerns for most business owners. Usually, this means going to a commercial broker to secure a loan. However, another highly viable method is to turn assets into cash, like property. And if you do, then capital gains tax needs to be considered.
Long-term loans have their uses. However, it is hard to ignore the potential that property of genuine value might have. This is especially true when that property is unused or is being poorly used. Hence, if you want to downsize your business, then selling off a poorly performing retail store and moving to a better location may be the best move. Whatever the reason, it is important that capital gains tax is kept in mind.
As with so many tax matters, there can be some confusion over how this tax works, and (more importantly) how to keep the tax liability as low as possible. At CommericalLoans.com.au, we have helped many clients to gain a clearer understanding of this issue. So, we have put together a general guide that should give you all a decent grounding.
How It Works
The system might be complicated, but the concept is pretty simple. Any sale of a business asset, such as business property, can result in an increase of business capital. This financial gain is subject to taxation. The figure that is taxed is the net profit from the sale. This is calculated by taking the sale proceeds and deducting the cost base relating to the property (original purchase price, fees etc). The difference is the sum subject to capital gains tax. The tax is charged at the income tax rate that the beneficiary pays. However, if a company is selling off property, then the corporate rate of 30% is charged.
The tax only becomes applicable when a ‘CGT event’ takes place. These include:
- Disposal by sale of your commercial property;
- The loss or destruction of the property (in a fire perhaps);
- The gifting of the property to someone else;
- Disposal caused by the owner of the property ceasing to be an Australian resident
The types of property (or assets) that come under capital gains tax are pretty extensive. But generally speaking, they include:
- Most real estate;
- Company shares;
- Intangible assets (goodwill);
- Vacant land;
- Business premises;
- Rental properties
Assets used for personal means are exempted. These include your home, car and business equipment or rental property fittings. Also, if the property was acquired before 20 September 1985, which is when the tax was introduced to Australia, then you should be exempted from any tax liability.
Unfortunately, even if your property is located overseas, as an Australian resident you are still subject to capital gains tax.
Making a Loss
Just because you sell property does not mean you are going to make a handsome profit. In such cases, you are not obliged to pay capital gains tax. But the good news is that, any capital losses can be offset against other capital gains in the same year or future years. So, if that dilapidated warehouse on the outskirts of town is sold for $5,000 less than you bought it for, you can knock $5,000 off the capital gain you made on the sale of your high street store. But be aware that, even though capital gains tax is considered a segment of your income tax, it cannot be used to offset any other taxable income. It is kept very much within its own category.
Be Prepared
Like all tax areas, documentation is vital. When it comes to capital gains tax, it is important to keep more than just receipts. Yes, the actual purchase price needs to be confirmed. The investment in or improvements to the property also need to be confirmed. In fact, as your accountant will testify, keeping records of transactions that may affect a future capital gain or loss is a core responsibility.
This is not just because of the taxman who wants to know the property’s actual worth, but to ensure that you do not pay more tax than necessary. The documentation you should store safely includes:
- Interest paid on related borrowings;
- Receipts of purchase;
- Records of expenses like legal fees, stamp duty etc.;
- Receipts covering land taxes, insurance bills, rates etc.;
- Receipts for repairs, maintenance and improvements;
- Any market valuations;
- Receipts for shares brokerage
Reducing CGT Amount
There are several ways to reduce the amount of capital gains tax you need to pay. Again, paperwork is essential in proving your entitlement to concessions and exemptions. The 2 most important factors to consider are that:
- Property must be owned for a minimum of 12 months;
- Companies do not qualify for discounts on any capital gains
Also, the particular savings on the amount paid relate to your status. For example, individuals and trusts can look forward to a 50% discount, while a 33.33% discount where the gain is to be invested into superannuation funds.
For small businesses, there are 4 specific ways to lower your capital gains tax sum, as long as the property sold is your business premises.
- 15 Year Exemption – If the business has owned the premises in question for a period of at least 15 years, it is possible to escape paying on capital gains completely. The business owner has to be 55 years old or over with an intention to retire or is permanently incapacitated (illness or injury), for the tax to be no longer applied.
- 50% Active Asset Reduction – Where an asset is being actively used by your business, a 50% active asset reduction is applied. The good news is that this is separate to the 12-month property ownership reduction of 50% mentioned above. That means you can actually lower your capital gains tax by 75%
- Retirement – This concession applies to business owners who are selling premises to fund their retirement. There is a lifetime limit of $500,000 to the condition, and where the business owner is aged under the age of 55, the exempted amount must be paid into either a superannuation fund or a retirement savings account.
- Rollover – As mentioned above, it is possible to avoid payment of the capital gains tax completely. This is applicable if the sale of your property is shown to be a loss. You can also defer payment of your capital gain until much later. This is useful when you sell your business premises (at a capital gain) to buy (at a larger sum) and move into a new premises. The tax owed from the sale can be deferred until the new premises are sold.
Commercial Property Advice from Commercial Loans
Whether buying or selling a commercial property, the implications that capital gains tax laws can have on your business’s capital and overall evaluation can be very significant. When buying commercial property it’s always wise to look ahead and see how an eventual sale might impact it. When selling commercial property, timing the transaction carefully might also be worthwhile.
CommericalLoans.com.au is your link to Australian’s top commercial loan brokers. To find out more about capital gains tax and how it affects the value of your commercial property, feel free to contact one of our financial experts either via our online enquiry form or by calling us on 1300 169 200.
But we do stress that you should speak to your financial advisor or accountant too. For more reading on the subject, check out:
- Capital Gains Tax from the Australian Taxation Office (ATO)
- Selling Commercial Premises also from the (ATO)
- Calculating and Paying Capital Gains Tax, a guide from National Australia Bank
- Capital Gains Tax, a guide from com.au
CommercialLoans.com.au does not accept any liability for any investment decisions made on the basis of this information. This website does not constitute financial advice and should not be taken as such. CommercialLoans.com.au urges you to obtain professional advice before proceeding with any investment
