Commercial Property – Capital Gains Tax and Depreciation

Author: Zac Gleeson, Managing Director of GQS

Capital Gains Tax is an important consideration when assessing the viability of a Tax Depreciation schedule on your commercial property. Below we summarise the key considerations and outcomes depending on your situation. 

Division 40 – Plant and Equipment & CGT

• Plant and Equipment (Division 40) items are typically treated separately to the CGT calculation at the disposal of a property, whether that be a commercial or residential property. Typically your Accountant, and or Solicitor, will arrange to on paper sell your Division 40 assets for the written down value (opening value less depreciation) hence no capital gain was made on these assets and hence no tax to be paid as a $nil profit.
• Therefore the depreciation you have claimed throughout the ownership of your property has reduced your tax payable through the holding period and you don’t essentially have to pay it back at the CGT event.
• Due to the temporary full expensing measures currently available to all businesses turning over less than $50M (property settlement post 6 October 2020) depreciation is extremely worthwhile for commercial property investors resulting an almost immediate cashflow boost.

Division 43 – Capital Works

• Through claiming depreciation on the capital improvements to the property (Division 43) you are in turn reducing your cost base, therefore increasing the amount of CGT applicable at disposal of the property.
• If you own the property as an individual (or as a partner in a partnership) and owned it for at least 12 months you may be eligible to discount your capital gain by 50%. This would make you 50% better off in your overall tax position should you have not claimed depreciation throughout the holding period of the property.
• If you are a small business entity (aggregated turnover less than $2M) and the property you sell is your business premises there are four potential options to reduce your capital gain:
  • 15-Year Exemption
  • 50% active asset reduction
  • Retirement exemption
  • Rollover

Summary

• At this point in time depreciation is extremely worthwhile for commercial property investors, even if you are intending to sell the property for a capital gain in the future, due to the immediate cashflow boost and likely no tax on profit implications on the Division 40 assets within the property. This can easily equate to tens or hundreds of thousands in money that otherwise would have been paid in tax.
• If you are a small business entity and meet the eligibility criteria you may be eligible for a CGT discount at the time of the disposal of the property meaning you have been far better off claiming Division 43 depreciation deductions rather than not.
• If you have bought the property in your individual name and held it for at least 12 months you will be eligible for a 50% discount on the capital gain. This meaning claiming depreciation throughout ownership of the property is 50% more valuable than the increased CGT liability at disposal.
• If you do not meet the small business entity criteria and not entitled to a CGT discount you have still been able to claim the significant benefits available through claiming Division 40 plant and equipment deductions. You have also, through claiming Division 43 depreciation deductions, had the opportunity to boost your cashflow and/or potentially reduced your loan through claiming Division 43 depreciation deductions although you will essentially pay back this benefit at the disposal of the property when no discount criteria is met.

If you have any questions, please don’t hesitate to contact us on 1300 290 235.