What you need to know about commercial property and tax

There are some key differences in the way that directly-owned commercial property and commercial property held in a fund are taxed that investors need to know about.

Capital gains and income from directly-owned commercial property are taxed in much the same way as for residential property, with a 50% discount on capital gains tax for investments held more than 12 months and the rent taxed at the owner's marginal tax rate.

And like residential property, they can deduct expenses such as rates, maintenance and interest costs from the income.

An important difference is that commercial property is subject to GST when sold, so buyers need to have enough additional cash to cover the GST added to the sale price, which they can then claim back from the Australia Taxation Office.

However, if the property is sold as part of a going concern business, it is not subject to GST. For instance, if a hairdressers shop was sold and along with the real estate it included basins, hair dryers, cutting equipment and stock such as shampoo and hair spray, along with goodwill and the business name, then it might not attract GST.

There are also potential capital gains discounts - in addition to the 50% discount available for holding property for 12 months - if it is sold as a business.

However, Michael Barone, a partner in Deloitte Australia's tax team, says the rules are complicated and individuals should seek advice.

Commercial property held in funds is taxed differently.

When property is held in a unit trust, the trustee will determine at the end of each financial year the income that should be distributed to the investors in the trust, that is the unit holders.

But importantly for investors, tax law operates differently to accounting principle and the tax law, says Barone.

It means that unit holders might be able to defer some of the tax payable on the distributions they receive from the fund. It happens because the trustees can claim tax deductions for depreciation on the build and capital works, says Barone.

These are accounting charges so they don't actually reduce the amount of cash in the distribution to investors. However, they do reduce the amount of tax payable, resulting in a saving for the investor.

However, Barone notes that it is only a tax deferral and investors will eventually have to pay "catch up" tax, often when the property is sold.

Even so, paying tax later rather than now is always good news for the taxpayer.

Get stories like this in our newsletters.