How Is Commercial Property Income Taxed in Australia?

Income from commercial property — including offices, retail shops, warehouses, factories, and industrial units — is treated as rental income and added to your assessable income for the financial year. Unlike residential rental properties, commercial properties are subject to GST, which has significant implications for both the landlord and the tenant.

Most commercial property leases are structured as gross leases or net leases. Under a net lease, the tenant pays outgoings such as council rates, insurance, and maintenance directly. The rental income you declare is the gross rent minus any outgoings you are responsible for. Under a gross lease, you receive a higher rent but must cover all outgoings. Each structure has different tax implications that affect your net rental return.

Commercial property leases typically run for 3 to 10 years, with fixed annual increases (often tied to CPI or a fixed percentage). This stability makes commercial property attractive for investors seeking predictable income. However, vacancy periods can be longer than residential properties, so maintaining a cash buffer is important. Use our take home pay calculator to see how commercial rental income affects your overall tax position.

For the 2025-26 financial year, the Stage 3 tax cuts mean most individual investors pay lower marginal rates on their rental income. The 16% rate applies to income between $18,201 and $45,000, the 30% rate applies between $45,001 and $135,000, and the 37% rate applies between $135,001 and $190,000. Understanding your marginal rate helps you estimate the tax impact of your commercial property investment.

GST and Commercial Property — What You Need to Know

The most significant difference between commercial and residential property tax is GST treatment. Residential rent is input-taxed (landlords cannot claim GST credits on expenses and do not charge GST on rent). Commercial rent is GST-creative, meaning landlords charge 10% GST on top of the rent and can claim input tax credits on their expenses.

If you purchase a commercial property, you may be able to claim the GST component of the purchase price if you are registered for GST and the vendor is also registered. This is done through the GST margin scheme or the standard GST credit claim. You must be registered for GST before settlement to claim the input tax credit on purchase. If you are not registered, you will lose this valuable tax benefit.

When you lease commercial property to tenants, you must issue tax invoices that include GST. Your tenants (if they are GST-registered businesses) can claim the GST back, so the net cost to them is the rent excluding GST. This makes commercial property tax-efficient from a tenant's perspective as well.

It is important to note that if you sell a commercial property, the sale is also subject to GST unless the purchaser is registered for GST and elects to use the GST margin scheme or the sale qualifies as a going concern (in which case it may be GST-free). Proper GST planning before selling can save significant amounts in tax.

Depreciation Benefits for Commercial Property

Commercial property investors enjoy some of the most generous depreciation deductions available in Australian tax law. There are two main types of depreciation claims available: capital works deductions (Division 43) and plant and equipment deductions (Division 40).

Capital works deductions allow you to claim 2.5% of the construction cost per year for 40 years on buildings constructed after 15 September 1987. If the building was constructed before this date but significant structural improvements have been made, you may still be able to claim. For industrial buildings constructed before 27 February 1992, the rate is 4% per year over 25 years. A quantity surveyor's report is essential to determine the correct construction cost and claimable amount.

Plant and equipment deductions cover the depreciable assets within the property, including air conditioning systems, elevators, fire safety equipment, security systems, carpets, blinds, and kitchen fit-outs. These items can be depreciated over their effective life, which ranges from 5 to 20 years depending on the asset. Since commercial properties are subject to GST, you claim GST-exclusive costs for depreciation purposes.

Unlike residential properties (where plant and equipment claims were restricted from 1 July 2017 for second-hand properties), commercial properties face no such restrictions. This means you can claim depreciation on both new and second-hand commercial properties, making them significantly more tax-advantaged than residential investments from a depreciation perspective.

Use our income tax calculator to see how depreciation deductions reduce your taxable rental income.

Capital Gains Tax on Commercial Property

When you sell a commercial property, you pay capital gains tax on the profit (sale price minus cost base). Unlike residential property, there is no main residence exemption for commercial property. However, several key tax concessions can reduce your CGT liability.

If you have held the commercial property for more than 12 months, you qualify for the 50% CGT discount as an individual investor. This reduces your taxable capital gain by half. For example, if you sell a warehouse for a $500,000 profit after holding it for 3 years, only $250,000 is added to your assessable income. This discount is not available to companies, which pay tax on the full capital gain at the corporate rate.

If the commercial property has been held in a SMSF or through a trust structure, different CGT rules apply. Trusts can distribute capital gains to beneficiaries who may then access their own CGT discount if they meet the 12-month holding requirement. Companies are taxed on capital gains at the company rate (25% for base rate entities, 30% for others) with no discount, but they can access the small business CGT concessions if certain conditions are met.

The small business CGT concessions are available for commercial property used in your business, including the 15-year exemption, the 50% active asset reduction, the retirement exemption, and the rollover concession. These can significantly reduce or eliminate CGT when selling a commercial property used in a small business. However, the property must be an active asset (used in the business) and your business turnover must be under $10 million or your net assets under $6 million.

Stamp Duty on Commercial Property

Stamp duty on commercial property varies significantly between Australian states and territories. Unlike residential property, some states offer lower stamp duty rates for commercial property or have higher thresholds before duty applies. For FY 2025-26, each state publishes its own duty rates, which are calculated on the property's market value or purchase price (whichever is higher).

In New South Wales, commercial property stamp duty ranges from 1.25% to 7% depending on the property value. In Victoria, the rate ranges from 1.4% to 6.5%. Queensland charges 1% to 5.75%, while Western Australia charges 1.9% to 5.15%. Unlike residential purchases, commercial buyers cannot access first-home buyer concessions or off-the-plan duty savings.

Foreign buyers face additional surcharges on commercial property purchases in most states, though the surcharges are generally lower than those for residential property. For example, NSW charges an 8% surcharge on residential purchases but only 4% on commercial acquisitions by foreign entities. Foreign investors should factor these additional costs into their feasibility calculations.

Stamp duty is not deductible as an immediate expense. Instead, it is added to the property's cost base for CGT purposes when you eventually sell. This means you will not get a tax deduction for stamp duty until you dispose of the property, which could be many years in the future. This treatment applies to all acquisition costs including legal fees, due diligence costs, and valuation fees.

Choosing the Right Ownership Structure

The way you own commercial property significantly affects your tax outcome. Individual ownership, company ownership, trust structures, and SMSF ownership each have distinct advantages and disadvantages depending on your circumstances and investment goals.

Individual ownership is the simplest structure. You pay tax on net rental income at your marginal rate and access the 50% CGT discount on sale. However, there is no asset protection, and losses cannot be distributed to other family members. This structure works well for smaller commercial properties held as a personal investment.

Company ownership limits your tax rate to 25% (if you qualify as a base rate entity) or 30%. Companies cannot access the CGT discount, but they can retain profits at the lower corporate rate. This structure is common for larger commercial portfolios where asset protection is important and profits are reinvested rather than distributed. However, selling shares in a company that owns property may convert a CGT event into a different tax treatment.

Trust structures (discretionary or unit trusts) offer flexibility in distributing income to beneficiaries at their marginal rates. Trusts can access the 50% CGT discount for assets held over 12 months. Unit trusts are particularly common for commercial property syndicates where multiple investors pool capital. However, trust structures have higher setup and compliance costs.

SMSF ownership of commercial property is common for business owners who wish to own their business premises through their super fund. The rental income is taxed at 15% (or 0% in pension phase), and CGT on sale may be as low as 10% (or 0% in pension phase). However, strict rules prohibit the SMSF trustee from leasing the property to a related party unless the property is business real property and the lease is on commercial terms.

Use our superannuation calculator to see the long-term benefits of holding commercial property inside your SMSF.

Expenses You Can Claim on Commercial Property

Commercial property investors can claim a wide range of deductible expenses. Interest on loans used to purchase or improve the property is fully deductible, and since commercial property loans typically have higher interest rates than residential loans, this can be a significant deduction. Borrowing costs (loan establishment fees, mortgage stamp duty, legal fees on the loan) are deductible over 5 years or the term of the loan, whichever is shorter.

Ongoing expenses include property management fees, council rates, land tax, insurance premiums (building, public liability, and loss of rent), repairs and maintenance, cleaning, security, and pest control. If you travel to inspect the property, you can claim travel expenses for the genuine purpose of managing the investment, though the ATO has tightened rules around travel claims for residential property — these restrictions do not apply to commercial property.

Capital expenses such as major renovations, structural improvements, and new construction are not immediately deductible. Instead, they are added to the property's cost base for CGT purposes or claimed as capital works deductions at 2.5% per year. Distinguishing between repairs (immediately deductible) and improvements (capital in nature) is important and sometimes requires professional judgement. A good rule of thumb is that restoring something to its original condition is a repair, while making something better than it was before is an improvement.

Legal expenses incurred in negotiating a new lease or renewing a lease are deductible over the term of the lease. If a lease is for 5 years, you claim 20% of the legal costs each year. Legal expenses related to the purchase of the property (conveyancing, due diligence) are added to the cost base and claimed when you sell.

Frequently Asked Questions

Is commercial property subject to land tax?

Yes, commercial property is generally subject to land tax in all Australian states except the Northern Territory. Land tax is calculated on the unimproved value of the land portion of the property, with each state having different thresholds and rates. For FY 2025-26, land tax is a deductible expense against your rental income. Unlike residential properties, there are no principal place of residence exemptions for commercial land.

Can I claim GST on the purchase of a commercial property?

Yes, if you are registered for GST and the vendor is also GST-registered, you can claim an input tax credit for the GST component of the purchase price. This is one of the major advantages of commercial property investment. However, you must be registered for GST before settlement, and the timing of your claim depends on whether you use the standard GST method or the margin scheme.

What is the difference between a gross lease and a net lease for tax purposes?

Under a gross lease, the landlord receives a higher rent but pays all outgoings (rates, insurance, maintenance). The total rental income is declared, and expenses are claimed separately. Under a net lease, the tenant pays outgoings directly, and the landlord receives a lower net rent. The net rent is declared as income, and the landlord claims fewer expenses. Both structures are tax-effective, but the choice affects your cash flow and GST calculations.

Do I pay capital gains tax when selling commercial property in Australia?

Yes, capital gains tax applies to the sale of commercial property in Australia. The gain is calculated as the sale price minus the cost base (purchase price plus acquisition costs and capital improvements). Individual investors qualify for the 50% CGT discount if they have held the property for more than 12 months. Companies do not qualify for the discount but may access small business CGT concessions if the property is an active asset used in a business.

Can I use negative gearing on commercial property?

Yes, negative gearing applies to commercial property in the same way as residential property. If your total expenses (including interest, depreciation, management fees, and maintenance) exceed your rental income, you can offset the loss against your other income. Commercial property often has higher interest costs and depreciation claims, which can make negative gearing more pronounced than residential property in the early years of ownership.

Should I hold commercial property in a company or trust?

The right structure depends on your investment goals. A company structure caps your tax rate at 25%-30% but denies the CGT discount. A trust structure offers income distribution flexibility and CGT discount access for individuals, but has higher compliance costs. Many experienced commercial property investors use a hybrid structure: a unit trust for the property itself, with a corporate trustee for asset protection. Professional advice from a tax accountant and property lawyer is essential before deciding.