Issues regarding GST and commercial property in Australia can often be confusing. However, through diligent research, working out the process of GST claims can reap substantial returns for your business during tax time.
Renting commercial property as a tenant
Renting commercial space can be a feasible option for a start-up or new business as it allows flexibility for change and growth. As initial costs in purchasing commercial property are high, being a tenant allows funds to be better utilised in other business areas such as recruitment or equipment upgrades.
One of the biggest advantages is that rent is tax deductible.
Do tenants pay GST on rent?
Tenants may be required to pay GST on their rent. As business owners can claim rent as a tax deduction, a tenant renting commercial property can submit claims for most business and office related expenses. In addition, the GST component of rent costs can be claimed as a GST credit (also known as an input tax credit).
GST on commercial rental bond
As part of a lease agreement, tenants may be required to also pay a bond. A bond is a form of financial security for the lease. It is usually paid at the start of the lease and returned when vacating a commercial premises.
A tenant does not pay GST on a commercial rental bond unless the amount is forfeited or part is withheld for damage to the premises or goods.
SECTION 1: Owning a commercial property
Diving into the world of commercial property can be a lucrative and exciting business decision.
Whether you’re a commercial landlord or looking to sell or buy commercial property, it’s prudent to take a close look at the GST implications around your specific business circumstances.
Registering for GST
The Australian Tax Office (ATO) requires businesses and enterprises to register for GST if the GST turnover (gross income minus GST) is $75,000 or more.
When it comes to commercial property, the GST turnover is considered to be the rental income.
Most commercial property transactions fall under the ATO’s definition of “carrying on an enterprise”
The Australian Government states, “An enterprise includes activities done in the form of a business”, such activities include renting or leasing property.
As such, investors of commercial property are placed under the same taxation rules as other businesses.
You are required to register for GST, if you’re leasing out commercial property that has a GST turnover of over $75,000.
You may be able to remain unregistered if the total rental income of your commercial real estate investment is under the $75,000 per annum threshold.
How to register for GST
Before registering for the GST, an Australian business number (ABN) is required. This process can be done online through the Australian Business Register website.
Once you have an ABN, you can register for the GST online through the ATO Business Portal. Your registered tax agent or BAS agent can also help with the process.
Selling a commercial property – paying GST
If you are in the position of selling commercial property and registered for GST, take into consideration the additional GST value to your selling price.
Vendors are usually liable to pay 10% to the ATO after the sales transaction. By adding GST in the price of your property, you are able to pass this amount onto the ATO without losing value to the initial sales price offered to your buyer.
Buying a commercial property – paying GST
There’s some good news for those looking to purchase commercial real estate – you are eligible to claim a GST credit that was included in the purchase price.
There are, however, certain conditions that must be met in the process for claiming back GST on your recently bought property.
– Both seller and buyer are GST registered
– The purchased property is legally defined as “carrying on an enterprise”
– The seller issues a tax invoice for the purchased property
– The seller has not applied the margin scheme to work out the GST included in the price of the property
– The property was not purchased as a GST-free supply
Commercial property sales transactions usually deal with significantly large figures and therefore the GST claim will also be substantial.
Buyers should be prepared for a possibly long process in receiving GST credit. The ATO will often pay extra attention when investigating and verifying larger claims. Therefore, the GST credit may not necessarily be received within the tax quarter that the GST claim was submitted.
Leasing a commercial property and GST
As mentioned earlier, those who own and lease commercial property are required by the ATO to register for GST if rental income is over the $75,000 per annum threshold.
Under ATO’s regulations, property that is already tenanted or partially tenanted can be sold as “supply of going concern” in which case, the buyer may be exempted from GST.
Again, certain conditions and requirements may apply, including:
– The buyer is registered (or required to be registered) for GST
– Payment has been made for the supply
– The buyer and vendor have written agreement that the sale is of a going concern
– The supplier supplies all things necessary for the continued operation of the business
– The supplier carries on the business until the day of supply
The GST issues involved in commercial property can be wide and varied, even complicated.
Whether you’re a tenant of commercial space or investing in commercial property as a landlord or vendor, due diligence is key.
Any information provided in this article is provided as general information and to be used as general information purposes only.
For specific details and advice regarding GST and commercial property, please contact the ATO or consult your registered tax professional.