When you buy a commercial property under the Australian Taxation Office (ATO) goods and services tax (GST)-free ‘going concern’ rules, it’s important to think about how you might use it in the future.
GST-free rules for the sale of a going concern generally apply to tenanted or partially tenanted commercial properties if certain conditions are met. But if the use of the property changes after settlement – for example, you convert part of it to residential – it can trigger unexpected GST adjustments.
Thinking ahead can help you avoid nasty surprises – namely, a hefty tax bill – down the track.
Going concerns, GST and commercial property
First, let’s take a quick look at going concerns, GST, commercial property and how they interact.
A going concern simply means a business that’s up and running – and expected to stay that way in the near future – not one being wound up or sold off in pieces.
When a business (or part of it) is sold as a ‘going concern’, you take over an operating business, not just individual assets. If certain conditions are met, the sale can be GST-free (a going concern exemption), even though it would normally attract GST.
If you sell a commercial property, it can qualify as a GST-free going concern if certain conditions are met:
- The property is being leased out when you sell it – In other words, there’s an existing tenant in place who’s paying rent
- You (the seller) are carrying on that leasing enterprise – This must be right up until the settlement date. The lease can’t end before the sale
- The buyer is registered or required to be registered for GST
- Both parties (seller and buyer) agree in writing that the sale is a going concern. This is typically written in the sale contract.
See also: Turning your rental into your home? Keep recording those holding costs!
The 10-year look-back period
When you buy a GST-free going concern property, it’s expected to keep earning taxable income. Shift its use down the track, and a GST adjustment could hit your bottom line.
Changes of use may include:
- Renting it out residentially
- Using it for private purposes
A GST increasing adjustment basically means you could have to pay back some of the GST exemption to the ATO (not the seller), based on the portion of the property that’s no longer used for taxable purposes.
The kicker is that this look-back period lasts over 10 years for properties costing more than $500,000. That means the ATO can check your property’s use for a long time after the sale. Ouch!
How it works in practice
Here are a couple of examples of what this situation could look like, including the amount of GST owing:
Example 1:
Emma buys a tenanted commercial property in Newcastle for $3.2 million under the GST-free going concern rules. The property is leased to local businesses, so no GST is payable at settlement.
Two years later, she converts 25% of the building into residential units. Because residential rent is input-taxed, she faces a GST adjustment of roughly $64,000, payable over the next eight years.
Example 2:
Mark buys a warehouse on the Central Coast that’s fully leased to a logistics company for a purchase price of $4 million. The sale qualifies as a GST-free going concern, so no GST is charged at settlement.
Five years later, Mark decides to use 25% of the warehouse for his own storage business rather than leasing it. Because that portion is no longer generating taxable income, he faces a GST adjustment of around $50,000, payable over the next five years.
See also: The big question: how can I reduce my tax
Plan ahead to avoid unexpected costs
To avoid being in a situation where you have to unexpectedly pay GST for a going concern you purchased, the key is to think and plan ahead.
Clarify your intended property use
Make sure you clarify the intended use for the property before settlement. If you know you might want to convert part of it to residential, use it privately, or repurpose it in any way, it’s worth discussing the implications with your accountant or tax advisor early.
Document the GST-free going concern status
Ensure the sale contract clearly documents the GST-free going concern status. Plus, make sure it documents any conditions around tenancy or business operations. Even small details, like ensuring leases continue until settlement, can make a big difference.
Factor the look-back period into budgeting
Factor the 10-year ATO look-back period into your budget and cash flow planning. Even years after buying, changes to how the property is used can trigger GST adjustments, so it’s important to plan for potential costs in advance.
Protect your investment with smart planning
Consider long-term flexibility to protect your investment.
This could include:
- Structuring ownership (operating structure) through trusts or companies
- Keeping existing commercial leases in place
- Carefully planning future fit-outs and partial changes in use
These are all designed to reduce the risk of triggering a GST adjustment if your plans change down the track.
By thinking ahead and structuring the purchase thoughtfully, you can keep your investment predictable and your finances secure.
Considering buying a property under GST-free going concern rules, or have you changed the use of a purchased property in the last 10 years? Contact your Maxim advisor or reach out to our team today for personalised professional advice.
