Selling commercial premises
When you sell (or otherwise cease to own) a commercial property, you're likely to make a capital gain or capital loss. Capital gains are subject to capital gains tax (CGT), with a discount for individuals and trusts, and concessions for small businesses.
You're also generally liable for GST on the sale price and can claim GST credits on related purchases. To work out the GST you may be eligible to use the margin scheme, under which your GST liability is one-eleventh of the margin on the sale of the property, rather than one-eleventh of the total selling price.
GST doesn't apply to property when it's being sold as part of a GST-free sale of a going concern.
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You're likely to make a capital gain or capital loss when you sell (or otherwise cease to own) a commercial property. If you make a net capital gain in an income year, you'll generally be liable for capital gains tax (CGT). If you make a net capital loss you can carry it forward and deduct it from your capital gains in later income years.
A capital gain, or capital loss, is the difference between what it cost you to obtain and improve the property (the cost base), and what you receive when you dispose of it. Amounts that you've claimed (or could have claimed) as a tax deduction are excluded from the property's cost base.
If you acquired the property before CGT came into effect on 20 September 1985, any capital gain or capital loss is disregarded. However, capital gains or capital losses from capital improvements made since 20 September 1985 are subject to CGT, even if you acquired the property before that date.
Discounts and concessions
If you own the property as an individual (including as a partner in a partnership), and you've owned it for at least 12 months, you may be eligible to discount your capital gain by 50%. This discount is also available to trusts, but not to companies.
If you are a small business entity and the property you sell is your business premises, you may be able to reduce the capital gain using one of four small business concessions:
- 15-year exemption: If your business has owned the premises for 15 years and you're 55 or over and are retiring, or are permanently incapacitated, you won't have an assessable capital gain when you sell.
- 50% active asset reduction: You can reduce the capital gain on your premises by 50%.
- Retirement exemption: Capital gains from the sale of your premises are exempt up to a lifetime limit of $500,000. If you're under 55, the exempt amount must be paid into a complying superannuation fund or retirement savings account.
- Rollover: You can defer your capital gain until another event happens that crystallises the gain. For example, if you sell your existing business premises and buy different premises for your business within a certain period, you can defer your capital gain until the new premises are sold.
If you sell commercial premises, such as shops, factories or offices, you're generally liable for GST on the sale price. This means you:
- pay GST of one-eleventh of the sale price
- can claim GST credits on your purchases that relate to selling the property (subject to the normal rules on GST credits) – such as the GST included in a real estate agent's fees.
But if your commercial property is being leased when you sell it, you may be able to treat your sale as a GST-free supply of a going concern.
You may be eligible to use the margin scheme to work out the GST on the sale of commercial premises (or new residential premises). Under this scheme, your GST liability is one-eleventh of the margin on the sale of the property, rather than one-eleventh of the total selling price. You can only apply the margin scheme if the sale is taxable.
The margin is generally the difference between the sale price and either:
- the amount you paid for the property, or
- an appropriate property valuation.
Whether you can use the margin scheme depends on how and when you purchased the property.
If you sell the property using the margin scheme any GST charged can't be claimed by the purchaser.
Registering for GST
If you are dealing with property, including one-off transactions (for example, you buy, sell, lease or develop), you may be considered to be conducting an enterprise. If so, you may be required to register for GST if your turnover from these activities exceeds the GST registration turnover threshold.
Selling a business as a going concern
If you sell property as part of a GST-free sale of a going concern:
- you're not liable for GST on the sale
- the seller and the purchaser may be able to claim GST on other expenses that relate to selling and buying the property – such as the GST in solicitors' fees.
A sale of a going concern is GST-free if all of the following apply:
- payment is made for the supply
- the purchaser is registered (or required to be registered) for GST
- the buyer and seller have agreed in writing that the sale is of a going concern
- the supplier supplies all things necessary for the continued operation of the business
- the supplier carries on the business until the day of supply.
Property that is part of a sale of a going concern can include:
- the premises, together with the assets and operating structure of the business
- a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale
- the sale of a partially tenanted building, where both of the following apply
- the vacant part of the building is either being actively marketed for lease or undergoing repairs or refurbishment
- all leases, agreements and covenants are included in the sale.
You're likely to make a capital gain or loss when you sell a commercial property, and any gain is subject to CGT, with a discount for individuals and trusts, and concessions for small businesses. Sales of commercial premises are also subject to GST, except for property included in a GST-free sale of a going concern.