Commercial Property Tax: What Business Owners Need to Know

Owning commercial property — whether as an investment or as a business owner occupying your own premises — has specific tax implications that differ from residential property. Understanding these implications helps ensure you're claiming what you're entitled to and meeting your obligations correctly.

This article covers the key tax considerations for commercial property owners. For tailored advice, commercial property accountant services in Burleigh Heads can help.

Rental Income

Rental income from commercial property is assessable income and must be included in your tax return. This includes:

• Regular rent payments
• Any additional rent or outgoings recovered from the tenant
• Lease incentives received (treatment depends on the structure)
• Insurance payouts for lost rent (in some cases)

The income is generally recognised when it's earned (invoiced or due), not necessarily when it's received — though the exact treatment depends on your accounting method.

Property Expenses

Expenses incurred in earning the rental income are generally deductible. Common deductions include:

• Council rates and land tax
• Water and sewerage charges
• Insurance (building, public liability, landlord insurance)
• Property management fees
• Cleaning and maintenance
• Pest control and gardening
• Repairs (see the distinction below)
• Advertising for tenants
• Legal fees for lease preparation (in some cases)

GST Considerations

Commercial property transactions are generally subject to GST, which is a key difference from residential property. If you're registered for GST:

• You charge GST on commercial rent
• You can claim GST credits on property expenses that include GST
• The GST treatment of property purchases and sales depends on whether the transaction is a taxable supply or going concern

For a detailed explanation, see our article on GST on commercial property explained.

Depreciation

Depreciation is one of the most valuable deductions for commercial property owners. There are two categories:

Capital Works (Building Depreciation)

You can claim depreciation on the building structure — typically 2.5 per cent per year over 40 years for buildings constructed after specific dates. The rate and eligibility depend on when the building was constructed and the type of construction.

Plant and Equipment

You can claim depreciation on assets within the property — air conditioning, carpet, lighting, security systems, and other removable assets. Each asset is depreciated over its effective life as determined by ATO guidelines.

A quantity surveyor can prepare a depreciation schedule that identifies and values all depreciable assets. This is a worthwhile investment for most commercial property owners, as it maximises the deductions claimed.

Interest

Interest on loans used to purchase or improve commercial property is generally deductible, provided the loan is used for income-producing purposes. This includes:

• Interest on the purchase loan
• Interest on loans for renovations or improvements
• Interest on loans used to fund property-related expenses

If the loan is partly for the property and partly for other purposes, only the property-related portion of the interest is deductible. Keep loan accounts separate to make this clear.

Repairs vs Improvements

The distinction between repairs and improvements is important because they're treated differently for tax:

• Repairs: restore the property to its original condition — fixing a broken window, repairing a leaking roof, replacing a damaged carpet. Generally deductible immediately.
• Improvements: enhance the property beyond its original condition — adding a new room, upgrading to a better quality finish, installing a new system that didn't exist before. Generally capital in nature and depreciated over time.

The distinction can be complex. Initial repairs (needed when the property was purchased) are generally not immediately deductible. Get advice on the specific treatment of any significant work.

Record Keeping

As with any investment, accurate records are essential. Keep:

• Rental statements and lease agreements
• Invoices and receipts for all property expenses
• Loan statements showing interest charges
• Depreciation schedule from a quantity surveyor
• Records of any capital improvements
• GST records if registered for GST

Records must be kept for at least five years. Cloud accounting software can help track property income and expenses throughout the year.

Ownership Structure

How the property is owned affects the tax treatment significantly:

• Personal ownership: rental income is taxed at your marginal rate. Capital gains may be eligible for discounts if held over 12 months.
• Company ownership: income is taxed at the company rate. No CGT discount applies on sale. Profits are trapped in the company until distributed.
• Trust ownership: income can be distributed to beneficiaries, offering flexibility. Capital gains treatment depends on the trust structure and distributions.
• SMSF ownership: can offer tax-effective treatment in retirement phase, but strict rules apply — including borrowing restrictions.

The structure should be considered before purchase, as changing it later can trigger stamp duty and capital gains tax. For more on structures, see our article on company vs trust for a small business.

Professional Accounting Advice

Commercial property tax is complex, and the rules change. Getting it wrong can mean missing deductions or claiming things that create compliance risk. Professional advice — ideally before purchase and then ongoing — helps ensure the structure and claims are appropriate.

For Burleigh Heads property owners, accounting services in Burleigh Heads can provide the advice and support needed to manage commercial property tax effectively.

Frequently Asked Questions

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