09 – Business premises
About a year ago I was chatting with a risk specialist and was astonished to hear him say he faced a stiff CGT charge on the sale of his office premises when he retired in a year or two.
(The meeting was driven by his concerns that retirement goodwill was falling in the face of the LIF commission reforms: concerns proven prescient, as you can read here: Financial planning practice values after life insurance reforms.)
But getting back to the point, ie the tax consequences of selling the office premises, many financial planners do not realise their business premises are usually CGT free assets as well: the small business CGT rules apply to business premises as much as they apply to the business itself.
As the ATO says on its website under the caption “Selling commercial premises”:
If you are a small business entity and the property you sell is your business premises, you may be able to reduce the capital gain using one of four small business concessions:
- 15-year exemption: If your business has owned the premises for 15 years and you’re 55 or over and are retiring, or are permanently incapacitated, you won’t have an assessable capital gain when you sell.
- 50% active asset reduction: You can reduce the capital gain on your premises by 50%.
- Retirement exemption: Capital gains from the sale of your premises are exempt up to a lifetime limit of $500,000. If you’re under 55, the exempt amount must be paid into a complying superannuation fund or retirement savings account.
- Rollover: You can defer your capital gain until another event happens that crystallises the gain. For example, if you sell your existing business premises and buy different premises for your business within a certain period, you can defer your capital gain until the new premises are sold.
This makes business premises, such as an office, a great investment because it is highly probable that these four exemptions will combine to eliminate any capital gain on ultimate sale.
For your clients business premises can be a small factory for a plumber, a shop front for a Pilates practice, a farm for a farmer, a bigger factory for a manufacturer and so on. It can even be a residential property if it is used for business purposes: “business premises” is a function of purpose, not architectural design.
The CGT small business concessions mean that any one of these investments used as business premises will generate a better after tax return for your client than an identical property not used as business premises.
As always, conditions apply. This is why you should always double check your advice with a tax qualified colleague and always include a warning on your SOA under paragraphs RG 175.375 and 175.376 that your client should obtain advice from their tax agent before proceeding with your advice.