Tax Compliance – Selling Commercial Property
Tax compliance must be considered when selling commercial property in order to ensure that the transaction is as beneficial and efficient as possible.
A primary taxation consideration for those seeking to sell or dispose of commercial premises is capital gains tax, depending on whether you have incurred a capital gain or a capital loss. You are likely to experience one of the two, as it is very unlikely that a commercial property will sell for the exact value at which it was previously purchased by the vendor. If the property is sold for an amount that is greater than the amount the vendor payed for it, a capital gain is incurred by the vendor.
A capital gain, that is, the amount of profit derived from the disposal of certain assets, is subject to the capital gains tax (CGT). CGT discounts are available to trusts, small businesses, and individuals.
It is likely that a GST liability will also be incurred during the sale, as sale prices generally attract GST. If you are registered for the GST or required to be registered for it, you may be able to claim GST credits in relation to the sale amount. If you have a GST liability, you may be able to calculate it using the margin scheme; this scheme allows you to calculate the GST you owe as one-eleventh of the marginal value derived from the sale. That is, not one-eleventh of the overall sale price, but one-eleventh of the difference in value between what you paid for the property and the amount you sold it for.
Commercial property sold as part of the sale of a going concern, that is an operational business enterprise, generally does not attract a GST liability on the sale price.
Capital Gains Tax (CGT)
For taxation purposes, the marginal difference the value at which an asset was purchased and the value at which it was later sold, is known as either a capital gain or capital loss. A capital gain is incurred when the asset is sold for an amount greater in value than the seller paid for it, that is, they made a profit on the sale. For our purposes, a capital gain is a profit made on the sale of a capital asset.
A capital loss is incurred when an asset is sold for an amount which is less than the seller paid for it, that is, they made a capital loss on the sale.
When a property is sold, it is likely that the seller has incurred either a capital gain or a capital loss on the sale. If a net capital gain is made for the income year, this attracts capital gains tax (CGT), which you pay as part of your tax return. If a net capital loss is incurred for the income year, you are able to have the capital loss carried forward into future income years where it can be used to decrease your capital gains liability.
An important concept in the calculation of capital gains and losses and the subsequent tax requirements is the cost base. In this context, the cost base refers to the difference between what it cost to acquire and improve a property, and the amount obtained following its disposal. The value of claimed or eligible tax deductions are not included in calculations of a property’s cost base. This means that if you perform capital works such as the construction of additional features or improvements, and these works are eligible for deduction from your tax bill, that the value of these works is not included as part of the cost base used to determine capital gains and losses.
Premises Acquired Before 20 September 1985 – This is the date on which capital gains tax came into effect, so if a property was acquired before this date there is no requirement to calculate or report any capital gain or loss incurred following the sale of the property. Somewhat confusingly, however, any additional improvements that count as capital improvements made to the property after that date still attract capital gains tax if a gain or loss is made on their value during the property’s sale.
Capital Gains Tax: Discounts and Concessions
Existing legislation allows individuals who own a property (including as partners in a couple) to claim a fifty percent discount on any capital gain incurred during its sale. This discount also applies to capital gains incurred by trusts, but not those incurred by companies.
Small businesses that own the property they use as a business premises have access to four small business CGT concessions. If the sale of such a business premises results in a capital gain, small businesses are able to use one of these concessions to reduce their capital gain:
• Capital gain rollover: A capital gain made on the sale of the business premises may be deferred until the gain is crystallized. This means that, if you were to purchase a new business premises with the amount obtained from the sale of your previous business premises, you are able to defer any capital gain until you sell the new business premises.
• Retirement exemption: For those over the age of 55, capital gains from the sale of property are exempt from CGT to a lifetime maximum of $500,000. For those under the age of 55, this concession may be obtained and the conceded amount must be paid into a retirement savings account or superannuation fund that meets the ATO requirements.
• 15-year exemption: For small businesses that have owned the business premises for 15 years or more, capital gains will not be assessed if the small business owner is either permanently incapacitated, or over the age of 55 and planning to retire.
• 50 percent active asset reduction: If your small business premises qualifies for an active asset reduction, any capital gain incurred during its sale may be reduced by 50 percent.
GST Liability Incurred Following the Sale of Commercial Premises
As stated at the beginning of the page, the sale of any commercial property generally results in a GST liability. Commercial premises include property that is used to operate a business or enterprise.
In the event that a commercial property is leased to a commercial tenant at the time of sale, the sale may be treated as a GST-free supply of going concern.
Using the Margin Scheme to Calculate GST Liability
If the sale of a commercial property results in a GST liability, you may be able to use what the ATO calls the margin scheme to calculate the amount of GST owed on the sale price. In this context, the margin is the difference between the amount received for the sale of a property, and either the amount that was paid for the property by the seller or a suitably appropriate property valuation.
Under the margin scheme, GST liability is generally calculated as one-eleventh of the sale margin. Being able to use the margin scheme depends on when the property was purchased, and how it was acquired.
For tax purposes, you might be assessed as conducting an enterprise if you buy, sell, develop, or lease property, even as a one-off. If you are assessed as conducting an enterprise, you are likely to attract a GST liability and therefore might be required to register for the GST.
Whether or not you will attract a GST liability depends on whether you exceed the GST registration turnover threshold.
Sale of Businesses as Going Concerns
When a property is sold and it includes a commercial tenant operating a going concern, it is generally assessed as being GST-free, and the parties to the transaction are able to claim GST credits on transactions involved in buying and selling the property (conveyancing fees, etc.)
In order for the sale to be GST-free, all of the following must be satisfied:
• The purchaser is either registered, or required to be registered, for the GST;
• Payment is made for the supply of the property;
• The supplier continues operating the business until the day of supply;
• The supplier provides the purchaser or a chosen successor with everything required for the continued operation of the supplier’s business;
• Both the supplier and the purchaser have entered into a written agreement which states that the sale is for a going concern.
The following may be included as property in the sale of a going concern:
• A building which has all its space occupied by commercial tenants, and that all of the covenants, agreements, and leases between the supplier and these tenants are included as part of the sale
• A commercial premises which contains the operating framework and assets used in the operation of the business, and
• A building which is occupied by one or more commercial tenants but is partially vacant, so long as the vacant part is actively available and being marketed for lease and all leases are included as part of the sale. If the vacant part of the building is currently being repaired or refurbished, then it may be counted as property in the sale of a going concern so long as other parts of the building are leased to commercial tenants.
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