Updated: Jun 29, 2021
There are several questions I am often asked as a long-term owner of retail shops:
Will GST be applied to the purchase of a commercial property?
Should I be registered for GST?
Will I need to charge my tenant GST on their rent and outgoings?
The source of my reply comes from many conversations I have had with my accountant, Ian Marsh. I have summarised our discussions on the requirement to be registered for GST for a particular transaction:
The application of GST is dependent upon the vendor selling the shop. If the owner is currently registered for GST and has been charging the tenant GST in the monthly invoices, then GST is applicable on the sale of the shop. In this case you, as the buyer, are required to be registered for GST. Now there is a twist, hypothetically the owner selling the property to you would charge you GST, you would pay the GST on settlement and then claim it back on your BAS statement, sort of pointless right?
Well the Government acknowledges this pointless transaction and hence allows an asset to be sold as "The Supply of A Going Concern", thus negating the need to charge and claim back GST on the sale.
The indicator that the current owner is registered and charging GST is in the Contract of Sale, the seller will have ticked the box "Sold as a Going Concern". If the seller has ticked this box they are declaring that they are registered for GST and have been charging GST to the tenant.
Another idea is to check with the tenant directly, call them and ask if they have been paying GST on their monthly invoice. Your solicitor will also tell you if GST is applicable to the transaction and what GST status the seller has indicated on the contract of sale.
For you to avoid paying GST on the sale of the property and benefit from the Government’s GST exemption on the “The Supply of a Going Concern”, you also need to be registered for GST. To do that you will need to have an Australian Business Number (ABN) and ensure that ABN is registered for GST. My advice here is to contact your accountant and review the purchase with them, if you don’t already have an ABN your accountant can easily request one and register it for GST.
Like most things tax related, there is another twist. You may have heard that if the rent collected from all your commercial properties is less than $75,000 per year, then you are not required to register for GST. Thus, saving you the hassle of preparing and submitting a quarterly BAS statement. Well, unfortunately this threshold doesn’t apply if the seller you are buying the property from is already registered for GST and has been charging GST. In that situation you need to also be registered for GST to avoid paying GST on the sale, unfortunately once you are registered for GST there’s no going back, you need to charge GST to the tenant and submit a quarterly BAS statement moving forward.
It should be noted that the purpose of this article is not to provide you financial advice but merely to highlight the key points you should discuss with your solicitor and accountant in relation to GST and purchasing a property.
The other point to understand is the $75,000 threshold is cumulative, it’s not per shop. If the sum of the annual rents from all of your properties is less than $75,000 per year, then you may not be required to be registered for GST in the situation where the seller is not GST registered. In the case where the seller and buyer are not required to be registered for GST and the rent collected is less than $75,000 per year, the transaction is deemed to be GST free and this should be noted on the Contract of Sale.
It is also important to note that the Australian Tax Act requires you to have a formal agreement in place between the Seller and Purchaser, signed by both parties clearly stating that the transaction is the supply of a going concern and GST free. This agreement is required in addition to the Contract of Sale.
Now as we mention in our book, Engines of Wealth -Commercial Retail Shops, we do not like buying properties that are vacant. If one was to buy a vacant property then under the Governments definitions it would not be considered “The Supply of a Going Concern” and GST would be applicable to the sale. The reason for this is that there is no current lease in place for the property.
The key message here is that It is critical to check with your solicitor on the GST status of the seller and what they have marked in relation to GST in the Contract of Sale, then review that advice with your accountant. At present the GST rate is 10%, so on a $500,000 property this equates to $50,000, a sizeable amount for an investor. You need to be extremely diligent and ensure your accountant and solicitor advise you on the GST status of a property transaction, it could save you thousands of dollars.