GST on Commercial Property Sales

GST on Sale of Commercial Property

Goods and Services Tax (GST) is typically payable on the sale of commercial property, including industrial, commercial, or retail land and buildings, as well as lots in bodies corporate used for those purposes. The issue of GST on commercial property sales can sometimes be complex, depending on the type of transaction and the specific circumstances involved.

Understanding the GST obligations for such transactions is crucial to ensure compliance and avoid unexpected costs.

Qualifications on GST Payable for Commercial Property Sales

There are however a number of qualifications as to whether GST is payable or the amount which is payable on a commercial property sale. The most common 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.

Plus GST

A “plus GST” contract offers the simplest way to handle GST on sale of commercial property. The seller adds GST to the price, and the buyer pays it at settlement. Afterwards, the buyer can claim an input tax credit for the GST paid.

However, this method often deters buyers. They must pay an extra 10% at settlement, leading to potential cashflow issues and a higher stamp duty, since it’s calculated on the GST-inclusive price. Additionally, using this method blocks the use of the margin scheme in future property transactions.

The Margin Scheme: An Overview

The use of the margin scheme in property transactions is becoming less common but still provides advantages, especially for subdividing and selling residential lots. However, determining eligibility for the margin scheme is increasingly challenging. To establish eligibility, it is often necessary to find records of property dealings since 1 July 2000. Additionally, some prior dealings may disqualify a property from using the margin scheme.

Eligibility Challenges Over Time

As time passes since the introduction of GST legislation, the likelihood that a property has been involved in transactions that prevent the use of the margin scheme increases. The margin scheme allows GST to be paid only on the “margin” between the property’s current price and its value at a specific time, typically 1 July 2000 or other relevant dates, depending on the circumstances.

The Impact of Choosing the Margin Scheme

Choosing to use the margin scheme is a significant decision because it means you cannot claim GST paid on acquisition as an input tax credit. However, this cost can be offset by substantial benefits, especially in residential developments where you cannot pass the GST cost on to buyers. The margin scheme reduces the amount of GST payable on the sale of lots created from the development.

Importance of Early GST Consideration

Before entering a contract for land acquisition, it is essential to determine the appropriate GST treatment. You must also ensure that the GST treatment is valid and effective.

Our Gold Coast commercial property lawyers can assist in evaluating GST options for property sales. We work closely with your accountants to ensure the best approach is taken.

Sale of Going Concern: A GST Exemption

The sale of a going concern exemption is relatively straightforward to apply. It typically applies when a property is used for an enterprise (business activity) and includes everything needed to continue that enterprise.

For example, if a commercial property under lease—such as an office building or a shop—remains leased after the sale, the transaction usually qualifies as the supply of a going concern and is GST-free. This is because transferring the property also transfers the business of being a landlord from the seller to the buyer.

Complexities in Applying the Exemption

While the sale of a going concern is often straightforward, there are cases where complexities arise. For instance, if a property is offered for lease but there is no valid lease, or if a lease has expired, applying the exemption can become challenging. Another complication occurs when a tenant with an option to purchase exercises that option. In this scenario, the tenant cannot become its own landlord, and GST will need to be paid, as the going concern exemption does not apply.

Best Practices for GST in Commercial Property Sales

When dealing with GST on sale of commercial property, the safest approach is to structure the sale on a “plus GST” basis. This ensures that if the exemptions are not validly applied, the seller remains responsible for paying the GST. Although the seller may have the right to recover the GST from the buyer, this approach guarantees compliance.

However, adding 10% GST to the sale price can deter buyers. It increases transfer duty and makes the transaction less appealing.

Expert Advice for Property Transactions

For these reasons, it is crucial to seek practical advice before making any decisions on GST treatment. Our property lawyers work closely with your accountants to ensure that you receive the correct guidance based on your specific circumstances.

For all commercial property enquiries, please contact Peter Muller on 0755 740111 or peterm@qbmlaw.com.au.