Purchasing a commercial property such as an office building, industrial or retail space is often more complex than buying a residential property.
The sale of each commercial property is a unique transaction and will often attract GST. Planning to factor in the GST (goods and services tax) into your budget is a wise move on your property investment journey.
In this article, we set out some of the key issues concerning GST when buying a commercial property.
What is the Goods and Services Tax (GST)?
The Australian Goods and Services Tax, commonly referred to as GST is a value-added tax of 10% on most goods and services.
GST is generally required where a seller is registered or required to be registered for GST and operating as an “enterprise”.
Do You Need to Pay GST on Commercial Property?
When purchasing a commercial property, you will be classified as an enterprise and once your turnover (as an investor or developer) is above $75,000 you are liable to pay GST, which is likely to be included in the final property price.
In rare circumstances when a property is part of a GST-free ‘supply of a going concern’ then GST does not apply. This might be applicable if the property belongs to one of the categories outlined below:
- Business premises (assets and the operating structure of the business must be sold together with the property)
- A fully tenanted building (all leases, agreements and covenants must be included in the sale)
- A partially tenanted building (the vacant part of the building must either be actively marketed for lease or undergoing renovation).
GST does not apply to the sale price of residential properties that are not new but applies to the sale of newly developed residential land by developers who are registered or need to be registered for GST.
Aside from paying GST on the sale of commercial property, GST applies to most expenses associated with owning and managing an investment property (such as repairs and maintenance, management, and marketing fees) unless the acquisition of the goods or services is from an unregistered entity.
Can You Claim GST Credits on Commercial Property Purchase?
If you are a commercial buyer and registered for GST, you are most likely entitled to claim GST credits.
To be eligible for GST credits the following requirements will need to be met:
- GST must have been paid at settlement
- Both the buyer and vendor must be GST registered
- The property must be used in carrying on an enterprise
- Tax deductions must be lodged within four years
- The property cannot be part of a GST-free ‘supply of a going concern’ or sold using the margin scheme
How Does GST Affect Buyers and Sellers of Commercial Properties?
It is commonly required that commercial property investors apply for an Australian Business Number (ABN) and register for GST with the tax office.
If it does not happen, they are likely to have to pay GST on any sale they have made since the time they were required to register.
For example, assuming a seller sold a property for $1,000,000 with no GST, but should have been registered, they will still have to pay the GST!
However, had they registered for GST prior to the sale, they would have sold the property for a GST-inclusive price of $1,100,000. You as a buyer will pay the GST upfront but then you can claim it back. The seller then pays their GST liability of $100,000 and takes home their $1,000,000 net.
If you are eligible, you may be able to use the margin scheme to work out the GST (note: if you go down this route, you will not be able to claim the GST credits).
According to Commercial Real Estate, this scheme is most often applied for land that will ultimately be used for residential purposes. Under the scheme, the 10 percent of GST payable is typically only calculated on the sales margin – that is, the sale price less the amount the property was bought for.
It is worth noting, that commercial property sellers should be clear about whether GST is included in the price when advertising the property. Also, once you have collected the GST, you should submit it to the ATO in your Business Activity Statement (BAS) or via another reporting method.
Failing to register and pay GST when applicable may also attract a penalty from the ATO.
Get Help with GST on Commercial Property in Perth
Purchasing a commercial property is a big investment decision with significant financial implications for both the seller and buyer.
Whether or not you are required to pay GST on the sale price of the property can be difficult to comprehend, but by doing your research and getting the right help, you will not miss out on claiming valuable GST credits, or neglect to pay GST when you are liable.
A good lawyer and the Australian Taxation Office (ATO) can help you understand your contract of sale and GST on commercial property purchases. It is also a good idea to look at some of the online GST calculator tools to calculate the exact amount of GST you will pay or should charge.
For a piece of specific advice on commercial property for sale in Perth, contact Ross Scarfone Real Estate. Our agents specialise in industrial and commercial real estate in Perth’s southeast corridor including Belmont, Welshpool, Kewdale, Victoria Park and surrounding areas.