The Goods and Services Tax (GST) is a value-added tax (indirect tax) levied on most goods and services sold in Australia, including GST on rent and commercial rentals. Understanding GST is especially important in the context of Australian taxation for property investors, as it affects compliance, tax planning, and investment returns.
The GST is levied at a rate of 10% and is paid by consumers when they purchase products, receive a given service or pay rent for commercial rental properties. Businesses then pass on the collected GST to the government when they lodge their activity statements.
If you’re thinking of buying or selling commercial real estate or considering GST on commercial property rental, there’s one crucial thing you must know: you have to factor in GST.
The Australian Tax Office (ATO), officially known as the Australian Taxation Office, is the main authority for GST and commercial property matters. The ATO typically considers the sale or lease of commercial property as a taxable supply. The sale or rent will attract goods and services tax if the seller is registered or required to register for GST.
This GST component of the transaction often surprises many new investors, but it’s essential to understand how GST works before you buy or rent commercial property; otherwise, you could be caught off guard with a bigger-than-planned tax bill. There are various GST issues that can arise in commercial property transactions, so it is important to seek guidance to avoid unexpected complications.
So, here’s what you need to know about how GST on commercial rental properties works, and why understanding the relationship between GST and commercial property investments in Australia is crucial for investors.
Is GST Payable on a Commercial Property Rental Transaction?
Generally, GST is payable on most commercial property transactions, including office buildings, warehouses, medical centres, retail shops, and commercial residential premises like hotels, if the seller is registered for GST and conducting an enterprise. These transactions are subject to GST if the relevant conditions are met, such as the property being used for commercial business purposes and the parties being registered for GST. This includes GST on commercial property rentals.
What Does it Mean to Conduct an Enterprise?
If you buy an investment property intending to immediately resell it for a profit or develop a property to sell, even if it’s a once-off transaction, the ATO will consider it an enterprise activity. If your enterprise activities generate more than the GST registration threshold (currently $75,000), you must register for GST. Rental income from commercial property is included in your GST turnover, so it counts towards this threshold.
So, if an investor or owner is selling or renting out a commercial property intending to make a profit, they’ll have to include GST in the contract of sale or lease with the buyer or tenant. The buyer or tenant is then responsible for paying GST (10% of the sale or rental price) in addition to the purchase or rental price, which the seller has to pay directly to the ATO.
Commercial property buyers or those looking into commercial real estate rental should, therefore, include GST in their budget when calculating the purchasing or rental cost. Commercial business owners need to monitor their GST turnover to ensure they remain compliant with GST obligations.
But there is some good news!
Although you, as the buyer, will have to pay GST at the settlement date, you can claim a GST credit.
How to Claim a Credit When You Pay GST on Commercial Rentals
When you buy or lease commercial property, you may be entitled to claim an input tax credit for the GST you paid. The GST credit is a refundable tax offset that can reduce the amount of GST you pay when purchasing commercial property. Tenants who are registered for GST may be able to claim input tax credits for the GST included in their rent payments.
There are, however, specific eligibility criteria you have to meet to claim GST credits, including:
- you must, along with the seller, be registered for GST;
- you must have paid GST at the time of the settlement;
- the seller issued a tax invoice for the purchase;
- a GST exemption did not apply (see discussion below);
- the seller did not apply the GST margin scheme; and
- you must report the GST paid and credits claimed in your business activity statement (BAS).
GST included in the purchase price or rent can be claimed as a credit if all requirements are met.
You can also claim GST credits on related expenses or expenses related to the commercial property, such as legal fees or real estate agent fees, provided you keep proper documentation.
What is the GST Margin Scheme?
When selling commercial property, the seller may use the margin scheme (if eligible) to reduce the amount of GST payable. The eligibility criteria for using the margin scheme, or understanding the margin scheme eligibility, depends on several factors. The GST treatment of the sale may differ if the margin scheme is applied, as it changes how GST is calculated and reported.
For example, if you buy an office premises for $3,000,000 (GST exclusive) and sell it for $3,750,000 (GST exclusive), a GST of 10% on the sale price is $375,000. Under the margin scheme, however, your GST is only $75,000 (10% of the $375,000 sales margin).
The eligibility criteria for using the margin scheme depends on two factors.
When the Seller Originally Purchased the Property
If they bought a property before July 1, 2000, you could use the margin scheme to calculate GST, because GST did not apply to the property before that date.
Any excess GST credits from the transaction may be used to offset other tax liabilities, such as income tax.
How GST is Applied
If the seller bought the property after July 1, 2000, the margin scheme could only apply in certain circumstances, including where the original seller:
- Wasn’t GST-registered,
- Sold the property as a GST-free supply, or
- Applied the margin scheme at the time of the sale.
When Does GST Not Apply on a Property Purchase or Rental?
When it comes to property purchases or rentals, there are a few instances when the commercial premises transaction is GST-free. This includes situations where the sale or lease is of a going concern for GST purposes – in other words, the property being sold is either:
- Business premises (business assets were sold with the property, and the business continues to operate under the new owner),
- A partially tenanted building (a tenant rents part of the building and the buyer also intends to lease out the vacant part of the commercial property to generate rental income), or
- Fully tenanted building
Additionally, residential properties are generally treated differently for GST purposes and are usually not subject to GST on rent.
For the sale to not attract GST, the contract of sale must expressly state that the property sold is a going concern.
Key Takeaways
As a commercial property investor in Australia, you must understand the Goods and Services Tax (GST) and how it applies to your investment transactions, especially GST on rent. Generally speaking, if you purchase a commercial property from a seller registered for GST, you will have to pay GST on the property’s purchase price.
You can, however, claim GST credits for this amount when you file your next quarterly BAS statement. This effectively reimburses you for any GST paid at settlement. There are also circumstances where GST may not apply to your transaction (i.e. a GST-free transaction), so it’s worth it to seek professional advice and get in touch with a property tax accountant to help you navigate your GST liability.
Here at KNS, our accountants can advise you on your GST obligations and help you navigate your GST liability. We can also assist with other taxation matters, such as capital gains tax and stamp duty. So, if you’re looking for expert advice on buying commercial property investments, talk to KNS today.
FAQs
Does Rent Have GST?
Yes, GST is typically applied to commercial property rentals and is applicable if the owner of the property is registered for GST. So, both property owners and tenants should be aware of this to ensure accurate financial planning and compliance.
What Is the Difference Between GST on Commercial Property and GST on Rent?
GST on commercial property primarily applies to the sale or purchase of the property. This means when a commercial property is bought or sold, GST may be applicable on the transaction amount.
On the other hand, GST on rent relates to the ongoing lease of the property, where the tenant may be required to pay it as part of their rental payments, depending on the owner’s GST registration status.
How Does GST Work on Commercial Rental Properties?
GST is applied at a rate of 10% on commercial rental properties if the owner is registered for GST.
If the property owner is registered for GST, the tenant would typically pay an additional 10% of the rent as GST. The property owner then remits this amount to the Australian Tax Office (ATO) as part of their tax obligations.
What Is Margin Scheme Eligibility in the Context of GST Commercial Property?
The margin scheme is a method that can be utilised to decrease the amount of GST payable on the sale of a commercial property. Instead of paying GST on the full sale price, it is calculated on the difference (or margin) between the property’s sale price and its original purchase price. Eligibility for the margin scheme is based on specific criteria, such as when the property was initially purchased and how GST was applied.
Is GST Applicable to All Commercial Real Estate Rentals?
No, GST is not universally applicable to all commercial real estate rentals. While many commercial property transactions will attract GST, there are exceptions. For example, transactions like the sale or lease of a going concern might be exempt from GST. So, you should be aware of these nuances to ensure accurate tax compliance.
How Can I Find Out More About GST on Commercial Property Rental?
For a comprehensive understanding of GST implications on commercial property rental, consulting with property tax accountants or specialists is advisable.
Experts, like those at KNS Accountants and Business Advisors, can provide tailored advice, ensuring you’re well-informed about your specific GST obligations and any potential exemptions.
