Commercial Property

How is GST addressed when dealing with adjustments for the sale of commercial property?

There are simple principles to consider.

All outgoings such as rent, owner’s corporation fees, land tax and rates are adjusted on a GST exclusive basis. While some adjustments like rent may have a GST component to it, when the rent is invoiced, the landlord/vendor incurs a liability to remit the GST on that rent instalment to the ATO. When settlement occurs during that rent period, it is appropriate that the vendor retains the amount of the GST so as to be able to discharge the liability.
In the usual case where rates are adjusted on a paid basis, the GST payable on the sale of the land and set out in the tax invoice is calculated on the adjusted purchase price.

The ATO has issued two rulings which are relevant to calculating GST on the sale of land – see:

GSTR 2004/9
GSTD 2006/3

Is the adjustment of rent for the sale of a business conducted from tenanted premises done on a GST exclusive or inclusive basis?

The adjustment between the vendor tenant and the purchaser tenant is done on a GST exclusive basis. The vendor tenant is entitled to claim the GST for the whole of the month as an input tax credit even though it may only be the tenant for the first day of the month – there is only one tax invoice for the month and the vendor will have and retain that.

A client owns a number of properties including a holiday home which a real estate agent is engaged to rent out on a temporary basis. Will this be treated as ‘commercial residential premises’ for GST purposes?

For a holiday home to be treated as ‘commercial residential premises’ it would need to be similar to a hotel, motel, inn, hostel or boarding house. The ATO in its final ruling GSTR 2012/6 sets out the eight characteristics that premises would have to possess to be considered ‘commercial residential premises’(see paragraph 12). They are:

commercial intention
multiple occupancy
holding out to the public
accommodation is the main purpose
central management
management offers accommodation in its own right
provision of, or arrangement for, services
occupants have status as guests.

A client owns a single commercial property as an investment. The client had not planned to register for GST because the rental return is less than $75,000 per annum. However, the client wants to sell and the sale of the property will raise more than $75,000. Does this mean the client needs to register after all?

No. Under s.188-25 the value received on the disposal of a capital asset by an entity that is neither registered nor required to register for GST is disregarded for the purposes of calculating projected annual turnover and so the proceeds of sale will not be treated as turnover for the purpose of the registration turnover threshold.

In some situations a property will not be considered a capital asset and will be considered trading stock and treated as turnover for the purposes of the registration turnover threshold if, for example, it was bought for the purposes of resale.

Three clients are selling a commercial property which is held half by two individuals and half by a company. The individuals are not registered for GST, however the company is. Would the entire purchase price attract GST or would GST only apply to a pro rata share of the purchase price reflecting the company’s half interest in the property?

A supply can only be taxable if the supplier is registered or required to be registered for GST. Therefore not being registered is only part of the story. You have to decide whether the individuals who are not registered are required to be registered.

It is necessary to ascertain whether the two individuals are carrying on an enterprise, either individually or in a tax law partnership (joint receipt of income). An entity’s enterprise includes any and all activities of a business nature, even though quite diverse and unrelated in nature. GST turnover consists of current GST turnover and projected GST turnover and includes turnover from all sources other than salaries and input taxed turnover.

Section 188-25 of the GST Act excludes the proceeds of realisation of a capital asset from projected GST turnover, so avoiding the situation where the proceeds of sale would otherwise trigger a requirement to be registered and a liability for GST.

If an entity’s GST turnover is at or above the turnover threshold of $75,000, the entity is required to be registered.

If the two individuals are neither registered nor required to be registered for GST, the supply of the company’s half share will be taxable but the share of the two individuals will not.

A client bought an old derelict warehouse with the intention of knocking it down and building new offices on it and selling them. He knocked the warehouse down and then ran out of money and has taken a job overseas and now wants to sell the property. He is not registered for GST as his only income is his salary from his job. Does he need to register?

An entity is required to be registered if its GST turnover is at or above the GST registration threshold ($75,000 p.a.). GST turnover consists of current GST turnover and projected GST turnover and includes turnover from all sources other than salaries and input taxed turnover. All too often, practitioners look at this issue on a property by property basis as if there could only be a requirement to be registered if the turnover generated by the subject property were at or above the registration turnover threshold.

A lot depends on the purpose of the clients in acquiring the land – if their intention was to acquire it for later resale, then it is trading stock and its value, when marked for sale, would form part of projected GST turnover and, in most cases, take the clients’ turnover over the registration threshold.

In this case the property was bought with the intention of resale, albeit with new buildings on it, so it is likely to be considered trading stock which will take the client’s turnover and projected turnover over the $75,000 and he will be required to be registered for GST. GST will then be payable on the sale.

See also the article by the ATO: Do you deal in property?

Is the adjustment of rent for the sale of tenanted commercial premises done on a GST exclusive or inclusive basis?

The adjustment between the vendor and purchaser of tenanted premises is done on a GST exclusive basis. The vendor of the land has to account for the GST for the whole of the month in which settlement occurs even though settlement may occur on the second day of the rental period.

A client has entered into the purchase of a commercial property. The contract is a ‘plus GST’ contract. The purchaser is registered for GST and an ABN search has revealed that the vendor became registered for GST after the contract was entered (but before settlement). Does the fact that the vendor was only registered after the contract was entered into mean that either: (a) the clients are not required to pay GST as the vendor was not registered at the time that the contracts were exchanged?; or (b) the clients will not be able to satisfy the ATO and the refund of GST will not be made to them?

Since the supply occurring under the contract is treated as being made at the time of settlement rather than on the day of sale, it is sufficient from the vendor’s perspective that registration occur before the settlement date.

Is penalty interest chargeable on the GST component of the balance of purchase money?

This is not a GST issue as much as a contractual one and the outcome depends on the wording of the penalty interest clause in the contract of sale.

If the contract is the standard LIV contract, the answer is that penalty interest is payable on the GST component as general condition 33 provides that interest is payable on any money owing under the contract during the period of default. Since the amount payable for GST is an amount payable under the contract at settlement, that amount would attract interest.

When a purchaser incurs a liability for penalty interest under a contract of sale does penalty interest attract GST?

Penalty interest does not attract GST. Penalty interest is treated as consideration for a financial supply and therefore input taxed.

If the contract is ‘price plus GST’ do you add GST to the stated price or the adjusted purchase price?

It may be argued that certain additional payments or reductions do not alter the purchase price but, instead represent payments made by the direction of one party on behalf of another (particularly with respect to mortgage discharge fees), or reimbursements of expenses incurred (or to be incurred). This can be further complicated if some of the ‘adjustments’ are in respect to 'taxable supplies' (i.e. they include GST) and some are GST-free.

Broadly, the ATO takes the view that where the contract stipulates that both the purchase price and the adjustment must be paid at settlement, the vendor is receiving, and the recipient is paying the adjusted amount for the supply of the land. Consequently, adjustments should be taken into account before calculating the 'plus GST' amount. In other words, GST is calculated based on the adjusted purchase price. For guidance, the ATO has issued public determination GSTD 2006/3.

I have a client who is selling commercial premises as legal personal representative for her deceased father. There is currently a tenant at the premises. I am advised that the deceased was never registered for GST and that the rental does not exceed $75,000. Should the sale be plus GST?

A supply cannot be taxable unless the supplier is registered for GST, or required to be.

In the case of estates, if the deceased was required to be registered, then the legal personal representative will also be required to be registered in his/her representative capacity.

The legal personal representative also may be required to be registered even where the deceased was not, if the administration of the estate produce a turnover at or above the registration threshold.

The threshold for registration is based on turnover rather than profitability. An entity is required to be registered if its GST turnover is at or above the GST registration threshold ($75,000 p.a.). GST turnover consists of current GST turnover and projected GST turnover and includes turnover from all sources other than salaries and input taxed turnover.

Section 188-25 of the GST Act excludes the proceeds of sale of a capital asset from projected GST turnover, avoiding a situation where the sale itself triggers a requirement to be registered; the exclusion does not apply where land is trading stock (for example, land acquired for resale).

So, where the supplier of a property is not registered or required to be registered and the property is not trading stock, the supply of the property is not taxable. If you find that there is a requirement to be registered, then the supply could qualify as a going concern given the property is tenanted.

My client is not registered for GST and he is selling a commercial property/factory for around $400,000. Do I need to deal with GST in the contract?

While your vendor client is not registered for GST the question you need to ask is whether he is required to be registered. The points to note are:

an entity is required to be registered if its GST turnover from an enterprise is at or above the GST registration threshold ($75,000 p.a.)
GST turnover consists of current GST turnover and projected GST turnover and includes turnover from all sources other than salaries and input taxed turnover
it is not a requirement that the enterprise be one relating to dealings in land
whether an entity is required to be registered is not judged on a property by property basis.

In your case, the GST turnover is not restricted to the turnover from the business that your client operates. It will certainly include that turnover, but will also include relevant turnover from other sources.

If the position is that your client is neither registered nor required to be registered for GST, section 188-25 of the GST Act excludes the proceeds of sale of a capital asset from projected GST turnover, so avoiding the situation where the sale itself triggers a requirement to be registered. This exclusion does not apply where land is trading stock, and land may become trading stock (for income tax and GST purposes) if acquired for the purpose of resale.

If there is any likelihood at all that your client is required to be registered, the contract should be ‘plus GST’ and you should determine his GST status one way or another and, if the indication is in favour of registration, register him.

If the property is leased, you should consider if the going concern exemption will apply.

If the property is not leased you should conside whether the margin scheme could be applied.

GST

Commercial Property