GST & Going Concern in Commercial Property
When buying or selling a commercial property, it’s crucial to understand the impact of Goods and Services Tax (GST) and how the going concern exemption can apply.
Proper structuring of a transaction can result in significant tax benefits and compliance ease for both buyers and sellers in the Australian commercial property market.
Understanding the ins and outs of GST on commercial property transactions is essential for making informed decisions and ensuring compliance with tax regulations. However, navigating the GST landscape can be daunting, given the different scenarios, rules, and exceptions that may apply.
Whether you’re a seasoned investor, a business owner looking to purchase commercial premises, or considering selling a business property, having a solid grasp of the GST requirements is crucial for a smooth and successful transaction.
GST on Commercial Property
Goods and Services Tax (GST) is a 10% tax applied to most goods and services in Australia, including commercial real estate transactions. If a property is sold as part of a business transaction, GST may apply unless an exemption is available.
Typically, GST is payable when:
- A commercial property is sold with vacant possession.
- A new commercial property is sold.
- A commercial property is leased (GST is added to rent).
- When your business or enterprise has a GST turnover (gross income from all businesses minus GST) of $75,000 or more you must register for GST
What is a Going Concern?
There are specific circumstances where GST doesn’t apply to commercial property transactions. One of the most common situations is a commercial property ‘sale of a going concern.’
A property transaction is considered a going concern when the business activities associated with the property continue seamlessly after the sale. This exemption is crucial in commercial property transactions as it allows the property to be sold without the additional GST burden.
For a property sale to qualify as a going concern, the following conditions must be met:
- Business premises: the property must be actively used in an income-producing enterprise at the time of sale and everything necessary to continue the business (such as assets, leases, agreements, and operation structures) must be transferred to the buyer with the sale of the property.
- Property is a fully tenanted building: where the property and all leases, agreements and covenants are included in the sale, or:
- Property is a partially tenanted building: where the vacant part of the building is either actively marketed for lease or undergoing repairs or refurbishment and all leases, agreements and covenants are included in the sale.
- Both parties must agree in writing: the contract for sale must specify that the sale is structured as a going concern
- Both parties must be registered for GST: both parties to the sale, that is, the buyer and seller must be registered for GST.
The sale of a property by itself is not regarded as a going concern.
Benefits of the Going Concern Exemption
- No GST Payable on Sale Price: the buyer avoids paying an additional 10% GST on the purchase price, reducing upfront costs.
- Cash Flow Benefits: without the need to pay and later claim GST credits, buyers have better cash flow management.
- Reduced Stamp Duty Costs: since stamp duty is calculated on the GST-inclusive amount, removing GST lowers stamp duty expenses.
- Simplified Compliance: both buyers and sellers avoid complex GST reporting and potential disputes over tax treatment.
Key Considerations & Risks
- Lease Agreements: if the property is leased, ensuring lease agreements remain intact at settlement is vital.
- ATO Scrutiny: the Australian Taxation Office (ATO) closely examines going concern claims. If the criteria are not met, GST may still apply.
- Contract Wording: legal advice should be sought to correctly draft the contract of sale, ensuring compliance with GST legislation.
- Buyer’s GST Registration: the buyer must be registered for GST to claim the going concern exemption.
Conclusion
Understanding GST implications and the going concern exemption is essential in commercial property transactions.
By structuring the sale correctly, buyers and sellers can benefit from tax savings and smoother settlements.
However, due diligence and expert legal and/or tax advice are recommended to ensure compliance with ATO regulations.
We recommend consulting with a property tax specialist or legal advisor to navigate the complexities of GST and commercial property transactions effectively.
References
ATO Website: ato.gov.au
Property Tax Specialists Website: Article “Commercial Property GST Australia: An Essential Guide for Buyers and Investors”