Capital Gains Tax (CGT) is the largest single-event tax cost most commercial property investors will face, and the structure of the buying entity, the cost base composition, and the holding period all materially affect the post-tax outcome. For most private investors, the CGT decision sits in the structural choices made before purchase, not in tax planning at the time of sale.
This guide covers how CGT applies to commercial property in Australia, the 50% individual and trust discount, the small business CGT concessions that can substantially reduce or eliminate CGT on eligible sales, and the buyer-side decisions that shape the future CGT outcome.
CGT is a structure question more than a sale question. The choice between individual, company, trust, and SMSF ownership is the principal determinant of the CGT outcome at eventual sale. Made well at purchase; very hard to fix later.
How CGT Works
CGT in Australia is administered through the income tax system. A capital gain on the sale of a CGT asset (which includes commercial property) is included in the seller's assessable income in the year of disposal. The gain is taxed at the seller's applicable income tax rate.
Cost base is the principal mechanic. The capital gain is the disposal price less the cost base. Cost base includes purchase price, stamp duty, legal fees, agent commissions, capital improvements, and certain holding costs not previously deducted.
1 The 50% Discount
Australian resident individuals and trusts (other than certain unit trusts) are eligible for a 50% CGT discount on gains where the asset has been held for at least 12 months. The discount halves the assessable capital gain, effectively halving the CGT rate for individuals.
Who gets the discount
- Individuals. 50% discount on eligible gains held 12+ months.
- Trusts (most discretionary and unit trusts). 50% discount flows through to beneficiaries.
- Self-managed superannuation funds. 1/3 discount (effectively 33.3%), reducing the SMSF's 15% headline rate to 10% on eligible gains.
- Companies. NO discount. Companies pay full 25% or 30% corporate rate on gains.
The absence of the CGT discount for companies is a major reason why direct corporate ownership of investment property is uncommon. Investors typically use individual ownership, family trusts (with company beneficiaries for income distribution flexibility), or unit trusts.
2 Cost Base Composition
A higher cost base reduces the capital gain. Cost base items include:
- Purchase price (excluding GST input tax credits claimed).
- Stamp duty on acquisition.
- Legal fees on acquisition.
- Title searches, building inspections, and other DD costs incidental to acquisition.
- Capital improvements (extensions, upgrades, major fit-outs).
- Holding costs not previously deducted (some interest, insurance, rates, where the property has not been used to produce assessable income).
- Disposal costs (agent commissions, legal fees on sale).
Capital expenses that have been depreciated under Division 40 of the Income Tax Assessment Act 1997 are excluded from cost base (they have already produced tax deductions during the holding period).
3 The Small Business CGT Concessions
Division 152 of the Income Tax Assessment Act 1997 provides four CGT concessions for small business taxpayers selling active assets used in the business. For business owners who own the commercial premises their business operates from, these concessions can be substantial.
Eligibility
- Small business entity test. Aggregated turnover under $2 million (with related entities).
- OR maximum net asset value test. Net assets under $6 million (with related entities).
- Active asset test. The property must be used in the business for the majority of the ownership period (with specific rules for the active asset percentage test).
The four concessions
- 15-year exemption. Full exemption if the asset was held for at least 15 years and the seller is over 55 and retiring (or permanently incapacitated).
- 50% active asset reduction. A further 50% reduction of the gain after the standard 50% individual discount.
- Retirement exemption. Up to $500,000 lifetime exemption per individual, with restrictions (under 55 must contribute to superannuation).
- Small business rollover. Defers tax by rolling the gain into a replacement active asset.
The interaction of these concessions is complex. A well-structured sale by an eligible small business owner can eliminate CGT entirely on a substantial gain.
4 Foreign Resident CGT Withholding
From 1 July 2025, foreign resident sellers of Australian real estate (including commercial property) are subject to a 15% non-final withholding tax on the disposal proceeds. The buyer is required to withhold and remit the amount to the ATO at settlement.
The foreign resident seller can apply for a variation of the withholding rate, and the withholding is non-final (the actual CGT liability is calculated at year end and the withholding is credited).
For Australian resident sellers, a Clearance Certificate from the ATO is required before settlement to avoid the withholding. The certificate is administratively straightforward for clear Australian residents but takes time to issue; it should be requested well before settlement.
5 CGT Events and Timing
CGT is triggered by a CGT event. The most common for property is CGT event A1 (disposal). The CGT event date is the contract date for disposal, not the settlement date.
Practical timing considerations
- Contract date determines the tax year of the gain. A contract signed in June settles in July but the gain falls in the June tax year.
- The 12-month holding period for the 50% discount is calculated from the contract acquisition date to the contract disposal date.
- Subdivisions and certain other CGT events have their own timing rules.
6 Structure Choices and CGT
Individual ownership
Eligible for 50% discount. Gain taxed at marginal income tax rate. Simplest structure for first-time investors. Lacks asset protection and succession flexibility.
Discretionary trust
Eligible for 50% discount (flows to beneficiaries). Gain distributable to beneficiaries with lower marginal rates. Strong asset protection. Land tax surcharge in some states for trusts without specified beneficiary exclusions.
Unit trust
Eligible for 50% discount (flows to unit holders). Defined beneficial interest provides land tax pass-through in some states. Common in property syndicate structures.
Company
NOT eligible for 50% discount. Gain taxed at corporate rate (25% small business or 30% standard). Useful as a beneficiary of a discretionary trust for income smoothing but rarely the direct property owner.
SMSF
1/3 discount (effectively 33.3%), reducing the 15% accumulation-phase tax rate to 10% on eligible gains. 0% tax rate on gains derived in pension phase (where the fund is paying account-based pensions). Powerful structure for long-term commercial property holds.
7 Practical Buyer-Side Considerations
Structure before contract
The CGT outcome is determined by the structure at acquisition. Changing the ownership structure after purchase typically triggers CGT itself, plus stamp duty in most states. Get the structure right before signing.
Documentation
Cost base evidence must be maintained from acquisition. Stamp duty receipts, legal invoices, capital improvement invoices, and depreciation schedules should be filed and retained for at least 5 years after disposal.
The small business test
If the commercial property will be used by the buyer's own business, the small business CGT concessions may be available at eventual sale. Structuring to preserve eligibility (e.g., not co-mingling with passive investment assets) is part of the upfront design.
Frequently Asked Questions
Can I avoid CGT on a commercial property sale?
Generally no. Specific concessions (15-year small business exemption, retirement exemption) can eliminate CGT for eligible sellers. For most investors, CGT applies on disposal at the seller's applicable rate after discounts.
How is the 12-month holding period calculated?
From contract date of acquisition to contract date of disposal. A property contracted on 1 March 2024 and sold under a contract dated 2 March 2025 qualifies; a contract dated 28 February 2025 does not.
What happens at death?
The transfer of a CGT asset to a beneficiary on death is not generally a CGT event for the deceased. The beneficiary takes the asset at the deceased's cost base (or market value at date of death, depending on the asset). CGT applies when the beneficiary later disposes of the asset.
Can I roll over a gain into a new property?
The small business rollover allows deferral of a gain into a replacement active asset for eligible small business owners. For passive investors, no general rollover relief is available; like-kind exchanges (common in US tax) do not exist in the Australian CGT system.