Goods and Services Tax (GST) is usually payable in the supply (sale) of commercial property – as an example industrial, commercial, or retail land or buildings, or lots in bodies corporate which are used for any of those purposes. The question of GST for commercial property sales can sometimes be quite complex.
There are however a number of qualifications as to whether GST is payable or the amount which is payable on a commercial property sale. Those most commonly scenarios encountered by our Gold Coast property lawyers are:
- a “plus GST contract”;
- The supply of property adopting the margin scheme; or
- The supply of a going concern.
The simplest method is a “plus GST” contract, when dealing with GST for commercial property sales. Essentially the seller sells on the basis that GST is in addition to the price. The buyer pays the GST to the seller at settlement, then claims an input tax credit for the GST paid. While it is the simplest method, it is often unattractive to buyers who will have to pay another 10% at settlement of the contract with resultant cashflow issues, as well as adding significantly to stamp duty which is assessed on the GST inclusive price. It also means that the margin scheme cannot be adopted in later dealings with the property.
The supply of property utilising the margin scheme is becoming less frequent, but still has its advantages particularly if the property is to be subdivided and sold as residential lots. The entitlement to use the margin scheme however is becoming more difficult to ascertain as it becomes more challenging to find records of dealings with land since 1 July 2000 – which tends to be necessary to establish that there is an eligibility – and as some previous dealings can prevent the margin scheme from being used. Essentially, as more time passes after the commencement of the GST legislation, the more likely that it is that property will have been dealt with in one way or another, and the less likely it will be that the margin scheme can be adopted. Adopting the margin scheme has the effect that GST is only payable on the “margin” in the price of the property over a certain value. That value is generally the value of the property at a particular time, sometimes 1 July, 2000 and sometimes other dates depending on the circumstances.
The choice to use the margin scheme in the acquisition of a property is a serious one, as it has the result that any GST payable on the acquisition cannot be claimed as an input tax credit. That “cost” however can be offset by substantial benefits in the appropriate case, with the reduction in the amount of GST which is payable on the sale of any lots created from the development of the land. This can be particularly attractive in residential development where the GST cost cannot be passed on to buyers. As a consequence, if you are intending to acquire land for development, it is critical to determine before the contract is entered into – and to have the contract reflect – what GST treatment there is to be in relation to the acquisition, and to establish that that GST treatment will be valid and effective. Our Gold Coast commercial property lawyers can assist in assessing the options for GST for commercial property sales, working in conjunction with your accountants.
The sale of a going concern exemption is much simpler to establish. It is available in most cases where the property is being used for an enterprise (a business activity) and all that is needed to carry on that enterprise is being sold. As a consequence, in a transaction for the sale of a property which is the subject of a commercial lease or leases (for example an office building of a stand-alone shop), and those leases will continue after settlement of the sale, then the sale of the property will usually be the supply of a going concern and GST free. This is because the supply of the property will transfer the enterprise of being a landlord from the seller to the buyer.
There can be some complexities with applying the exemption for the supply of a going concern to some property sales, for example if a property is offered for lease but there is no valid lease, or if a lease has expired. Another complexity is where a tenant with an option to purchase wishes to exercise that option – in that case, the tenant cannot become its own landlord and will have to pay GST as the exemption for the supply of a going concern will not apply.
When considering GST for commercial property sales, the safest approach is to sell on a “plus GST” basis. That is because if the exemptions are not validly applied, it is the seller’s primary responsibility to pay the GST even if they have a right of recovery against the buyer. That said, payment of 10% GST on top of the price can be a hurdle for buyers and will increase transfer duty, so it makes the purchase less attractive. That will potentially affect the price. Ultimately practical advice is needed before a decision is made. Our property lawyers will work in conjunction with your accountants to ensure that the correct advice is given according to your circumstances.