When a property is held through a company, the tax implications and strategic considerations differ significantly from individual ownership. Companies do not benefit from the 50% Capital Gains Tax (CGT) discount available to individuals, and the tax rate applied to profits is the company tax rate, which is generally lower than the top personal tax rate but lacks the concessions available to individuals.
Under Division 40 of ITAA 1997, companies can claim depreciation on plant and equipment, while Division 43 allows deductions on capital works. However, these deductions are treated as company expenses, reducing taxable profit rather than personal tax liability. A key misconception is that companies can access the same depreciation benefits as individuals, but this is not the case. Companies cannot claim Division 40 depreciation on second-hand plant and equipment acquired after 9 May 2017, similar to individuals.
To see how this plays out, consider a company that owns a 2015-built commercial property in Melbourne's CBD, purchased for $1.2 million. The company claims building depreciation under Division 43 at a rate of 2.5%, equating to $30,000 annually. If the property is sold five years later for $1.5 million, the company faces CGT on the entire gain without the 50% discount, resulting in a higher tax obligation compared to an individual owner.
In our experience reviewing thousands of properties across Australia, companies often overlook the impact of not accessing the CGT discount, leading to unexpected tax liabilities upon sale. Additionally, many companies fail to optimise their depreciation schedules, missing out on potential tax savings. It's also common to see companies not fully considering the implications of property-related expenses on their overall tax position.
The answer can differ depending on your situation. For example, if the property was acquired before 9 May 2017, some grandfathered depreciation benefits might apply. The company's business structure, such as being part of a larger corporate group or an SME, can also affect tax treatment. Additionally, properties held through a company in a trust structure may have different implications, particularly concerning income distribution and asset protection.
Given the complexities involved, it is crucial to seek advice from a Chartered Quantity Surveyor and an accountant. They can provide a comprehensive analysis tailored to the company's specific circumstances, ensuring compliance and maximising tax efficiency.