Australia Real Estate Investment Tax Guide
Australian real estate investment taxation beyond the standard rental property. The guide covers: the commercial property investment (the "commercial real estate") — the commercial property (the "commercial property" — the office, the retail, the industrial, the warehouse) is subject to the same tax rules as the residential property but with the key differences: (a) the GST applies to the commercial rent (the "commercial rent" is subject to the GST at 10% — the tenant pays the GST on the rent and the landlord must remit the GST to the ATO), (b) the GST applies to the sale of the commercial property (the "sale of the commercial property" is subject to the GST at 10% — the purchaser can claim the GST credits if registered for the GST), (c) the "depreciation" (the "capital works deduction" at 2.5% or 4%) applies to the commercial buildings, (d) the "plant and the equipment" depreciation applies to the commercial property assets; the property development (the "property development") — the property developer is treated as the "trading entity" (the "developer" is carrying on the "business of the property development"); the profit on the sale of the developed property is the "ordinary income" (the "income from the business" — NOT the "capital gain" under the CGT); the developer is NOT eligible for the 50% CGT discount; the developer must register for the GST and charge the GST on the sale of the "new residential premises" (the "new residential premises" — the premises that have NOT been previously sold as the residential premises); the developer can use the "margin scheme" (the "GST margin scheme") to calculate the GST on the sale; the GST under the margin scheme is 10% of the "margin" (the "margin" — the sale price minus the "acquisition cost" of the land); the developer can also claim the "input tax credits" (the "GST credits") for the development costs (the "construction costs", the "architect fees", the "engineering fees"); the GST margin scheme (the "margin scheme") — the developer can elect to use the margin scheme if: (a) the developer acquired the land BEFORE 1 July 2000, OR (b) the developer acquired the land AFTER 30 June 2000 and the "GST was NOT included in the price" (the "GST-free supply" — the "supply of the residential property" before the development); the margin scheme reduces the GST liability (the "GST on the margin" vs the "GST on the full sale price"); the developer must notify the purchaser of the margin scheme election (the "margin scheme notification"); the Australian Real Estate Investment Trusts (the "A-REITs") — the A-REITs (the "Australian Real Estate Investment Trusts") are the listed entities that invest in the Australian commercial real estate; the A-REITs distribute the "trust income" (the "net income of the trust") to the unitholders; the A-REIT distributions include: (a) the "rental income" (the "assessable income" for the unitholder), (b) the "capital gains" (the "CGT-concessional amounts" — the unitholder can apply the 50% CGT discount to the capital gains component), (c) the "return of capital" (the "tax-free distribution" — the unitholder reduces the cost base of the units); the A-REITs may also distribute the "foreign income" (the "foreign sourced income" with the foreign tax credits); the property syndicates (the "property syndicates") — the property syndicate is the investment vehicle that pools the funds from the multiple investors to acquire the commercial property; the property syndicate is typically structured as the "unit trust" (the "managed investment scheme" — the "MIS"); the investors (the "unitholders") receive the distributions of the rental income and the capital gains; the investors can claim the deductions for the "interest on the investment loan" used to acquire the units in the syndicate; the capital works deduction (the "Division 43") — the capital works deduction at 2.5% per year for 40 years applies to the buildings constructed after 15 September 1987; the rate of 4% per year for 25 years applies to the industrial buildings constructed after 26 February 1992; the capital works deduction is available for the commercial properties, the industrial properties, the warehouses, the hotels, the motels, and the residential properties (the "investment properties"). All amounts in Australian Dollars (AUD). For related reading, see our Property Tax Guide → and GST Guide →.
Commercial vs Residential — GST Difference
- Commercial rent — GST applies: The commercial rent is subject to the GST at 10%. The landlord must charge the GST and remit it to the ATO through the BAS. The tenant (if registered for the GST) can claim the GST credits on the rent. The residential rent is "input-taxed" — the GST does NOT apply and the landlord cannot claim the GST credits.
- Sale of the commercial property — GST applies: The sale of the commercial property is subject to the GST at 10%. The purchaser (if registered for the GST) can claim the GST credits. The sale of the existing residential property is "input-taxed" — the GST does NOT apply and the seller cannot claim the GST credits.
For the margin scheme and the new residential premises GST, see our GST Guide →.
A-REIT Distributions
- Tax components: The A-REIT distributions include the "rental income" (taxed at the marginal rate), the "capital gains" (the 50% CGT discount applies to the discounted capital gains), the "return of capital" (tax-free — the cost base is reduced), and the "foreign income" (with the foreign tax credits). The annual tax statement from the A-REIT shows the breakdown of the components.
- Tax-deferred distributions: The A-REIT distributions may include the "tax-deferred" component (the "return of capital"). The tax-deferred amount is NOT included in the assessable income but reduces the "cost base" of the units. If the cost base is reduced to zero, the subsequent distributions are fully taxable as the "capital gains".
For the capital gains on the disposal of the A-REIT units and the 50% CGT discount, see our Capital Gains Tax Guide →.