GST on the Sale of Commercial Properties

Ten percent on top of the purchase price of a commercial property is a substantial sum of money for most purchasers to fund in addition to the purchase price. It is therefore not surprising that the question in most purchasers’ mind in buying a commercial property is "Will there be GST on the purchase?". Although the purchaser may be entitled to input tax credits on any GST payable on the purchase price, GST may present cash-flow problems or an issue for the purchaser in arranging for additional finance.

Where the vendor of a commercial property is registered, or required to be registered for GST purposes, a sale of the commercial property will in most cases be subject to GST.

There are however provisions in the GST legislation that exempt the sale of commercial properties from being subject to GST in certain circumstances. Generally, commercial properties that are held by the vendors as investments and are leased to tenants will fall within the "supply of a going concern" exemption. However, where any of the following circumstances apply the GST implications are not as straight forward:

• The commercial property is not fully tenanted;
• The commercial property is partly used for residential purposes; and/or
• The commercial property is partly occupied by the Vendor.

If the above circumstances exist, the "supply of a going concern" exemption would not apply on the whole amount of the purchase price. GST would only be exempt on the portion that relates to a commercial lease.

Vendors often incorrectly charge GST on the full purchase price. Where any one or more of the above circumstances exist, it is very important for the parties (particularly the purchaser) to correctly deal with the GST issues in the sale and purchase contract before the contract is entered into. Where the "supply of a going concern" exemption is applicable on part of the purchase price of the commercial property, it would partly relieve the purchaser from cash flow issues or having to arrange for additional finance. More importantly it would also save the purchaser from incurring extra but unnecessary stamp duty and government fees on the transfer of the commercial property.

If you are unsure about the GST treatment on the sale or purchase of a commercial property or have any other tax related questions, we recommend that you contact Darren Foeng on 8223 6499.