At a glance:
- Depreciation: Claim deductions for building structure and fixed items.
- Capital Gains Tax Discounts: Benefit from substantial CGT reductions.
- SMSF Investments: Enjoy concessional tax rates and capital gains concessions.
- Negative Gearing: Offset property losses against other income.
- Deductible Expenses: Reduce taxable income with deductible costs like loan interest and maintenance.
- Building and Land Tax Concessions: Take advantage of tax incentives in growth areas
Investing in commercial real estate can be a savvy move, especially in a robust market like Melbourne and its surrounding suburbs. At Axis Property, we bring our extensive knowledge and experience in this market to the table, guiding you through the numerous tax advantages of commercial real estate investment and instilling confidence in your investment decisions.
The Australian property market, especially in thriving areas like Melbourne, presents unique opportunities that can significantly boost investment returns. By capitalizing on specific tax benefits, investors can reduce their tax liabilities and unlock the potential for substantial profits, igniting enthusiasm and drive in their investment journey.
In this blog, we will explore six key tax advantages that make commercial real estate investment attractive for both new and experienced investors. Taking advantage of these tax benefits is essential, whether you are aiming to diversify your portfolio or secure a steady and lucrative investment.
Let’s examine how depreciation, capital gains tax discounts, self-managed super funds, negative gearing, deductible expenses, and building and land tax concessions can benefit you in the Australian commercial real estate landscape. Understanding these benefits and how to access them puts you in control of your investment strategy, empowering you to make informed decisions.
Depreciation
One of the most significant tax benefits of investing in commercial real estate is depreciation. Depreciation allows investors to deduct the cost of the property’s physical structure over time, reducing taxable income. In Australia, commercial buildings can be depreciated over 40 years at a 2.5% rate of depreciation per year under the Australian Taxation Office (ATO) guidelines.
Depreciation is split into two categories:
Capital Works Deductions (Division 43): This includes deductions for the building structure and any fixed items such as bricks, mortar, walls, flooring, wiring, and plumbing. For commercial properties, these can typically be claimed at a rate of 2.5% per year.
Plant and Equipment Deductions (Division 40): This covers easily removable or mechanical items, such as air conditioning units, office fittings, and machinery. These items have varying rates of depreciation.
By taking full advantage of these deductions, investors can significantly reduce their taxable income, effectively enhancing their cash flow and overall return on investment.
Capital Gains Tax Discounts
When you sell a commercial property, any profit made is subject to Capital Gains Tax (CGT). However, in Australia, investors benefit from substantial CGT discounts. If the property has been held for more than 12 months, individual investors can receive a 50% discount on the capital gains, while superannuation funds can receive a 33.33% discount.
For example, if you purchased a commercial property for $1 million and sold it five years later for $1.5 million, the $500,000 profit would be subject to CGT. With the 50% discount, only $250,000 would be added to your assessable income, significantly lowering your tax liability.
Self-Managed Super Funds (SMSFs)
Investing in commercial real estate through a Self-Managed Super Fund (SMSF) can offer compelling tax advantages. SMSFs allow individuals to have greater control over their retirement savings and investment strategies, including real estate.
The tax benefits of SMSFs include:
Concessional Tax Rates: Income from commercial properties within an SMSF is taxed at a maximum rate of 15% during the accumulation phase and can be tax-free when the fund is in the pension phase.
Capital Gains Tax Concessions: If the property is held for more than 12 months, the capital gains tax rate is reduced to 10%, and it can be entirely tax-free if sold during the pension phase.
Additionally, leasing commercial property to your business through an SMSF can be advantageous, provided the lease terms are conducted on a commercial basis. This ensures the business’s rent is tax-deductible while contributing to the SMSF’s growth.
Negative Gearing
Negative gearing occurs when the income from your investment property is less than the expenses, including loan interest, maintenance, and other costs. While this may sound like a disadvantage, it can actually offer significant tax benefits in Australia.
Negative gearing allows investors to offset their investment property losses against other income, such as salary or business income. This reduces the overall taxable income and, consequently, the amount of tax payable. For example, if your commercial property generates $50,000 in rental income but incurs $70,000 in expenses, the $20,000 loss can be deducted from your other income sources.
This strategy is particularly effective in markets where property values and rental income are expected to rise over time, ultimately turning a negatively geared property into a positively geared one. So, you must do due diligence on the property market before purchasing a commercial property.
Deductible Expenses
Commercial real estate investors can claim a wide range of expenses as tax deductions, further enhancing the profitability of their investment. These deductible expenses include:
Interest on Loans: Interest payments on loans taken out to purchase or improve commercial properties are fully deductible.
Repairs and Maintenance: Costs associated with maintaining the property, such as painting, fixing leaks, and servicing air conditioning units, are deductible in the year they are incurred.
Management Fees: Fees paid to property managers or real estate agents for managing the property are also deductible.
Insurance: Premiums for insuring the property against damage or loss can be claimed as deductions.
Utilities and Strata Fees: Costs related to utilities and strata management fees are deductible.
By claiming these expenses, investors can significantly reduce their taxable income, improving their overall investment returns.
Building and Land Tax Concessions
Certain areas, particularly in growth corridors and urban renewal precincts around Melbourne, may offer building and land tax concessions to encourage development and investment. These concessions can come in various forms, such as land tax exemptions, rebates, or reductions.
For instance, the Victorian Government occasionally provides incentives for developments in designated areas to stimulate economic growth. These concessions can reduce the overall tax burden on your commercial property investment, making it more financially attractive.
Staying informed about current incentives and working with knowledgeable professionals like those at Axis Property can help you take full advantage of these opportunities. This ensures your commercial real estate investment is as tax-efficient as possible.
Investing in commercial real estate in Melbourne and its surrounding suburbs offers numerous tax advantages that can significantly enhance your investment returns. From depreciation and capital gains tax discounts to the strategic use of SMSFs and negative gearing, understanding these benefits is crucial for making informed investment decisions.
At Axis Property, our expertise in the local market ensures that we can guide you through these complexities, helping you maximise the profitability of your commercial real estate investments. Whether you are a seasoned investor or just starting, the tax advantages available can make commercial real estate an exceptionally rewarding investment choice.
For more detailed information and personalised advice, feel free to contact our expert team at Axis Property. We’re here to help you navigate the Melbourne commercial real estate market and achieve your investment goals.