GST on Commercial Property Sales

Qualifications affecting GST on commercial property sales

There are a number of factors that affect whether GST is payable, and the amount payable, on the sale of commercial property. Common scenarios include:

• A “plus GST” contract
• The supply of property under the margin scheme
• The supply of a going concern

Plus GST

A “plus GST” contract is the most straightforward method of dealing with GST on the sale of commercial property. The seller adds GST to the purchase price, and the buyer pays that amount at settlement. The buyer may then be entitled to claim an input tax credit, subject to eligibility. This structure may impact buyer cash flow, as GST is payable upfront at settlement. It may also increase transfer duty where calculated on a GST-inclusive price, and can affect the availability of the margin scheme in subsequent transactions.

The margin scheme

The margin scheme allows GST to be calculated on the margin rather than the full sale price, where eligibility requirements are met. Eligibility for the margin scheme depends on the history of the property and prior transactions. Establishing eligibility often requires a review of historical dealings, including transactions dating back to 1 July 2000. Certain prior dealings may prevent the use of the margin scheme.

Eligibility challenges over time

As time passes, it becomes more likely that a property has been involved in transactions that affect eligibility for the margin scheme. The margin scheme allows GST to be calculated on the difference between the sale price and an earlier value of the property, often as at 1 July 2000 or another relevant date, depending on the circumstances.

The impact of choosing the margin scheme

The margin scheme is a significant consideration, as it generally prevents the purchaser from claiming an input tax credit for GST paid on acquisition. However, it may provide advantages in certain transactions, including developments where GST cannot be passed on to purchasers. The margin scheme reduces the GST payable on the sale of subdivided lots.

Importance of early GST consideration

Before entering into a contract, it is important to determine the appropriate GST treatment and ensure that it is valid and properly documented. Our commercial property lawyers can assist in assessing GST options and work with your accountant to ensure the most appropriate structure is adopted.

Sale of a going concern: GST exemption

The supply of a going concern may be GST-free where the statutory requirements are satisfied. This typically applies where a property is sold as part of an enterprise and includes everything necessary for the continued operation of that enterprise.

For example, where a commercial property is subject to an existing lease that continues after settlement, the transaction may qualify as the supply of a going concern. In these circumstances, the purchaser effectively acquires the enterprise of leasing the property.

Complexities in applying the exemption

Although the going concern exemption can apply, it is dependent on strict requirements being met. Issues may arise where there is no valid lease in place at settlement, or where a lease has expired.

Complexity can also arise where a tenant exercises an option to purchase. In those circumstances, the exemption will generally not apply and GST may be payable.

Best practices for GST in commercial property sales

When dealing with GST on the sale of commercial property, it is often prudent to structure the contract on a “plus GST” basis. This reduces risk where an exemption is later found not to apply, as the seller remains protected.

However, applying GST to the purchase price may affect buyer demand and increase transfer duty where calculated on a GST-inclusive amount.

Expert advice for property transactions

It is important to obtain legal advice before determining the GST treatment of a transaction. Our property lawyers work closely with your accountant to ensure the appropriate approach is adopted.

For commercial property enquiries, contact Peter Muller on 07 5574 0111 or peterm@qbmlaw.com.au