Understanding your tax obligations is complex at any time, but especially if you’re investing in commercial real estate for the first time. We’ve gleaned some tips from the experts on what you need to know and how to improve your position.
Tax obligations can be complex, especially if you’re a first-time commercial property investor. What do you need to pay, what deductions can you claim and how can you improve your position?
Let’s take a look first at what you’re expected to pay. If you own commercial property, the Australian Taxation Office (ATO) is keen to receive both the GST that is due and also the income tax payable from your rental earnings.
What tax is payable?
When you have a factory, office or shop for lease, the rent you charge normally includes GST. This is remitted to the ATO, usually on a quarterly basis.
You must also include the rent you earn in your annual income tax return. If the property is owned through another entity, such as a company or trust, the rent will be included in its tax return.
What deductions are available?
When doing your annual tax return, you can claim certain deductions for expenses incurred by having your commercial property available for lease:
• Costs related to the management and maintenance of the property can generally be claimed in the year they’re incurred. • Other expenses such as the depreciation of carpet, fittings, furniture and appliances can be claimed over a number of years.
Things that can’t be claimed include:
• The costs of buying or selling the commercial property – these are usually included in the property's cost base for capital gains tax purposes. • Expenses that are not actually incurred by you, such as your tenants’ water or electricity charges. • Expenses that are not related to the rental of the property, such as renovations carried out while the property is not being leased.
As for the GST, when submitting your BAS you can claim credit on any purchases related to renting out your property, such as the GST included in the managing agent's fees. This is such a wide-ranging issue that it is only possible to give a general idea of the deductions available. We suggest that you consult with an accountant who is familiar with both current tax legislation and your situation.
How can you improve your tax position?
There are some fundamentals you can put in place that will optimise your tax position. Deloitte Private’s Keith Hardy says the first-time commercial property investor needs to keep three things in mind: how you buy it, how you lease it and how you finance it.
1. How you buy the property
Consider carefully the structure used to purchase the property, whether you are buying as an individual investor, through a trust or in a company name.
“Investors often purchase commercial property through a trust, because it offers a capital gains tax advantage on sale, since the gain is distributed to individual beneficiaries,” says Hardy.
On the other hand, a company is in a better position to benefit from losses.
‘If you’re negatively geared and the rental yields mean you’re going to be in a loss position, those losses will be trapped in a trust because it cannot distribute a loss out to its beneficiaries or its unit holders. Likewise, if you own commercial real estate as an individual, you really need to look at protecting any business assets or other borrowings already in your name, which is why people usually opt for a trust.”
Ultimately, the structure you choose will depend on your situation, but it is wise to talk with your accountant or financial advisor before proceeding.
2. How you lease the property
Hardy says that when negotiating the lease, it’s important to delineate between what’s part of the building and what the chattels are, since certain chattels will offer tax benefits for the owner.
“Often it’s simply a matter of structuring the contract so that you separate out items that could give rise to capital allowances and depreciation.”
If you’re unsure, consult a quantity surveyor. They will be able to tell you which is which and give you an idea of their depreciable value.
3. How you finance the property
The way you finance your commercial property purchase also has tax implications, Hardy says.
“Generally, interest will be tax deductible in full for the purchase of commercial real estate, but it’s a matter of looking at the type of finance to ensure that it does actually come within the rules of the tax act and that it satisfies the tax office.”
Costs incurred in borrowing are not an outright tax deduction, but you can generally write them off over the period of the loan.
Nothing is straightforward when it comes to claiming deductions for repairs and maintenance of your commercial property.
“Unless they are considered ‘initial repair’, repairs and maintenance to the property will be tax deductible if they’re deemed genuine repairs. If they give rise to new capital assets, however, then they’re depreciable. The only difference to that rule is: if you buy something in disrepair, the costs of bringing it back to its original state are not tax deductible, but considered part of the capital cost.”
What we can glean from all this is that we don’t know much at all when it comes to dealing with the ATO. But while we definitely have obligations to pay our dues, there are many ways we can minimise them through careful planning and consultation with a knowledgeable accountant.