Mercia | Taxation, Business & Finance Advisers

Facts: The property is zoned commercial/residential R80 and is currently used as a Doctors surgery – the owner is the Doctor.

Question: Under what circumstances does the buyer pay GST? Does GST apply to the purchase if;

• If the property is purchased as part of the purchase of the existing doctors practice (as a going concern)
• If the property is bought for commercial use and the existing owner then stays on as the tenant
• If the property is bought for other commercial use (leased to a different commercial tenant)
• If the property is bought as a commercial premises for the buyers own business
• If the property is bought for residential purposes

If GST is applicable when bought for residential purposes, can the buyer claim it back? How does a buyer do this if they don’t have an ABN and are not paying GST (eg a normal salary/wage earner)?

ANSWER:

Q1: Under what circumstances does the buyer pay GST?

If the vendor is selling a commercial property and the vendor is registered for GST, then the sale (supply) of property is generally subject to gst and the buyer must pay the GST unless an exemption applies (as referred to below) assuming s9-5 of the <GST Act> apply.

Q2: Does GST apply to the purchase if the property is purchased as part of the purchase of the existing doctors practice (as a going concern)

NO, GST is not payable, however it’s important that this is clearly indicated in the sale contract or in writing before settlement. It is important that the vendor and purchaser seek advice from their accountant so that conditions are met to allow the exemption, in particular it is important  that “the supplier provides all things necessary for the continued operation of the enterprise and the supplier carries on the enterprise (doctor surgery) until the day of the supply.

Q3: Does GST apply to the purchase if the property is bought for commercial use and the existing owner then stays on as the tenant.

Again the vendor and accountant need to seek advice, however in broad terms it works like this:

1. The letting of a property is considered to be an enterprise for GST purposes.
2. The vendor (landlord) can sell a tenanted building GST-Free provided that the landlord supplies all things necessary for the purchaser to continue the leasing enterprise. This means that the landlord must sell the property subject to the existing lease.

Q4: If the property is bought for other commercial use (leased to a different commercial tenant).

Again specific advice should be sight for this situation, however in broad terms:

1. The vendor is not selling the property subject to the existing leases if the leases are terminated as a consequence of the property being purchased in which case the going concern condition may not be met. If this is the case, the Purchaser and vendor can sell the property without the going concern and the purchaser can claim the gst paid in their first BAS return after purchase.
2. It is possible for the doctor (vendor) to sell their business to a purchaser who operates the business in a different building, and for the vendor’s building to be sold as a going concern, this is explained in GSTR 2002/5 and again for this situation the vendor should seek advice from the accountant and examine the facts and draw up sale contracts (often a tri-party agreement where a different location is used for the business) with the considerations of the law included to ensure the going concern exemption is satisfied.

Q5: If the property is bought as a commercial premises for the buyers own business.

Again specific advice should be sought for this situation, however in broad terms:

1. Similar to the above.

Q6: If the property is bought for residential purposes.

Again specific advice should be sight for this situation, however in broad terms:

1. Similar to the above. Of course a supply of rental of residential property (premises) by way of lease, hire, license is input taxed S40-35(1)(a). Input taxes supplies are not subject to GST. Residential premises is defined (s195-1) as: Land or building that (a) I occupied as a residence or (b) is intended to be occupied, and is capable of being occupied as a residence. The ATO takes the view that even if the property is not being used as a residential premises, they will still consider it to be residential premises if it is capable of being occupied as a residence.

If GST is applicable when bought for residential purposes, can the buyer claim it back? Yes provided the purchaser is registered for GST.

For a property transaction to be a taxable supply (subject to GST) all of the elements of s9-5 of the <GST Act> must be met that being, you make a taxable supply if:

(a)  you make the supply for * consideration; and

(b)  the supply is made in the course or furtherance of an * enterprise that you * carry on; and

(c)  the supply is * connected with Australia; and

(d)  you are * registered, or * required to be registered.

However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed.

The most common occasions when the property will not be a taxable supply (subject to GST) are when (1) the sale of the property is not in the course of furtherance of an enterprise (2) the sale of the property is gst free or input taxed (residential premises) or (3) the taxpayer (vendor) is not registered or required to be registered.

How does a buyer do this if they don’t have an ABN and are not paying GST (e.g. a normal salary/wage earner)? Without looking at the specific situation, a buyer should be careful buying a commercial premises that is subject to GST and where the purchaser is not registered for GST or required to be registered for GST. It would be prudent for a buyer to ensure the sale price (inclusive of gst) be the market value of the property.

Source NTAA 4/2004:Tax&Property:P29, P36,P158; <GST Act>.