Capital Gains Tax or ‘CGT’ at a basic level is a tax applied to the profit arising from the sale / disposal of certain assets – including commercial property.
CGT is not a separate tax, but a component of your income tax. This means that the rate of tax you pay on a capital gain (the profit on the sale of the asset) depends on your other income. The rate of tax you will pay will depend on who it is selling the asset – ie an individual (who will be taxed at their marginal tax rate), a company (charged at 30%) etc
When does it apply from?
In general most assets purchased before 20 September 1985 will not be subject to CGT.
How do I know if I have to pay CGT?
To determine whether you have to pay CGT, you will need to know if you have made a net capital gain (in general have you sold a CGT asset for a profit). For this, you will need to know the following:
- whether a CGT event has happened ie sale of an asset (see below for a list of CGT events)
- the date of the CGT event (ie pre or post 21 September 1985)
- what assets are subject to CGT (see below for a list of assets)
- the date and amount of any expenditure you incurred that forms part of the cost base of the asset, (ie full cost of purchase of asset) and
- the amount of money and value of property you received – or were entitled to receive – for the asset (generally how much was the asset sold for?)
Is Commercial Property a CGT asset?
Commercial property purchased after 21 September 1985 IS generally a CGT asset and there will be tax payable on the gain made from the sale of your commercial property.
For more information on CGT assets read ‘What is a CGT asset?’ on the ATO Website.
What are CGT events?
CGT events are the different types of transactions that may create a capital gain or capital loss.
The most common CGT event happens if you dispose of / (sell) a CGT asset (ie your commercial property) to someone else – for example, if you sell it or give it away, including to a relative.
What Discounts May I be Entitled to on the Sale of My Commercial Property?
If the owner of the commercial property is an individual for tax purposes (ie not a company or superfund) and the property is held for at least 1 year then any gain is first discounted by 50%.
If the owner of the commercial property is a superfund and the property is held for at least 1 year then any gain is first discounted by 33 1/3%.
Any Net Capital Losses (ie if you sell your property and make a loss) in a tax year may be carried forward and offset against future capital gains (ie profits you make from the sale of other commercial properties).
Be aware that the rules that apply for CGT discounts are different for Companies that own commercial property. In general there is NO discount applied to the profit on the sale of the property if the property is held for more than 1 year. This is not the case if the property is owned in a discretionary trust with a company as trustee so be sure to check your legal structure with your accountant.
Example of Tax Payable on the Gain from Sale of a Commercial Property Owned by an Individual
As mentioned CGT is not a separate tax, but a component of income tax. This means that the rate of tax you pay on a capital gain depends on your other income and thus your individual marginal rate see Individual income tax rates on the ATO web site.
To make it simple, lets say Sally’s taxable income of $56,000 in 2008-09 included a net capital gain of $1,000 from the sale of her commercial property.
The standard tax rate that applies to income between $34,001 and $80,000 for 2008-09 is 30%, plus the Medicare levy of 1.5%.?The tax and Medicare levy that applies to Fran’s capital gain is $315 (31.5% x $1,000).
Small Business CGT Concessions
This is advice of a general nature and is not to be considered personal financial advice. The ATO has published ‘Guide to Capital Gains Tax Concessions For Small Business 2008 2009’. We recommend all small businesses looking at disposing of commercial property to review this guide or alternatively seek assistance from a qualified financial advisor.