The commercial real estate game can be extremely lucrative. However, like any niche, it comes with its own set of requirements and complexities to be mastered to take full advantage of the opportunities that it presents.
From calculating the yield on your investment, to constructing a water-tight lease agreement with your tenants; there’s plenty of homework for you to do to ensure you’re maximising your return.
One area that frequently gets little attention until later in commercial property transaction process is GST. We’re all familiar with the relatively simple workings of GST as consumers. Those who run a company will also likely be acquainted with the slightly more complicated process of charging and claiming back GST in their businesses. When it comes to investing in commercial property, there are a few subtle differences with which it pays to familiarise yourself. Neglect this crucial aspect, and you could be doing yourself quite a disservice. Read on, and you’ll be one step closer to mastering the art:
Do I Need to Register for GST?
In most cases, the answer is a simple “yes”. Most commercial property transactions fall under the ATO’s definition of “carrying on an enterprise”, placing the investor under the same taxation rules as any other business. You might be able to get away with being unregistered if the total rental income from your portfolio is under the $75,000 per annum threshold, however, this will leave you unable to claim back the GST paid on any property purchases that you’ve made, so it’s decidedly in your best interests to register.
Selling Commercial Property and GST
If you’re registered for GST and neglect to add it to the sale price when you’re selling a commercial property, you might be in for a rude shock at tax time when you must remit 10% of the non-GST-inclusive sale price to the ATO, eroding the return on your investment. So, if you sold your property for $500K and neglected to add GST, the bad news is that $50K if that goes to the government, leaving you with $450K. Ouch.
If you fail to register at all and make a GST applicable sale, you risk incurring significant penalties in addition to the GST amount if it ever catches up to you. In the worst-case scenario, you could theoretically end up making a loss on the deal.
There are certain exceptions to the rule. GST may not apply to:
- The sale of a property as a going concern if a number of specific conditions are met.
- Rare cases where the sale of a property is input-tax free
Buying Commercial Property and GST
One of the great advantages of buying commercial property is the ability to claim back the GST portion of the purchase price. This can make a significant impact on your overall tax burden. The process is relatively simple, as long as a few critical conditions are met:
- The seller and purchaser are both registered for GST
- The purchased property will be utilised for carrying on an enterprise
- The seller issues a tax invoice
- The seller is not employing the margin scheme to work out his or her GST obligations. This is extremely rare in the case of commercial real estate.
Buyers should always keep in mind that as most commercial property transactions are quite sizeable, they will entail a similarly large GST claim. The ATO often flags larger claims for investigation and verification, and this can cause significant delays in the processing of your application. Buyers should not assume that they will receive their credit back promptly at the completion of the tax quarter and should arrange their finances accordingly.
Leasing Commercial Property and GST
As mentioned above, if your rental income exceeds $75,000 per annum, you are required to register for and pay GST. The only potential complication here is when a buyer purchases a property that is already tenanted. This may classify the property as a going concern, in which case it is exempt from GST as explained above. Leasing of commercial residential properties, such as hotels, attracts a lower GST rate of only 5.5%.
That wasn’t so difficult, was it? Now that you’re armed with all the relevant information, you can check that box and approach your next foray into the commercial property world with greater confidence.