I am looking at purchasing a commercial shop, which is currently empty, and residential premises (2 units), which are upstairs, for approximately $1.3m, in a trust structure. They are on the same title.
Is GST payable on purchase? That is, is it already included in the $1.3m? Is GST payable on the commercial premises only?
The annual rental for the shop is estimated at $75k. If the rental was $76k pa, does that trigger the requirement to register for GST? If the rental is $76k pa but outgoings reduce it to say, $74k, do I have to register for GST?
The rental on the units is approx. $40k pa. Is GST payable on this?
When I go to sell do I have to charge GST on both the shop and units, if on the same title or just the shop? Does the position change if all units and the shop are on separate titles? Does the situation change if the units were held for more than 5 years?
If I was to subdivide the 2 units into 4 units, does this trigger any GST consequences? It is possible that the structure may be expanded upstairs, to accommodate 4 units, but that is not certain at this stage.
Ask bantacs only answers one question at a time, there are several in this question but if I give you the fundamentals of the law you will be able to see how I get the very basic answers I give you at the end. I have not answered the last paragraph as that is another set of issues all together, you could post another askbantacs but reading GSTR 2003/3 http://law.ato.gov.au/atolaw/view.htm?Docid=GST/GSTR20033/NAT/ATO/00001&PiT=99991231235958 is a good place to start to find your answer.
Now to the purchase of this property as it stands. Firstly I need to point out that there is talk of changing the GST law in regard to buying commercial property where it will become the purchaser’s responsibility to pay the GST when they purchase the property not the sellers. In the meantime here is how the law will apply to you:
GSTR 2012/5 http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20125/NAT/ATO/00001 describes what is residential premises for GST purposes. AS you can see at paragraph 40 that a property all on one title will need to be apportioned between the part that is subject to GST and the part that is not. Accordingly we should go forward from here looking at the property differently for the portion that is designed for residential use compared with the portion that is commercial.
Unless it is the first sale of new or substantially renovated (refer GSTR 2003/3) residential property then GST does not apply whether the owner is registered for GST or not. So regarding the two current units if you sold them you would not have to remit part of the selling price in GST to the ATO and you do not charge GST in the rent you receive
Now to the non residential portion of the property. Whether the seller pays GST on the sale price of a commercial property depends on whether they are registered for GST. The price quoted should be the GST inclusive price but take care, look at the contract it could say plus GST or have a clause that says you have to pay more if GST applies. If the seller does pay GST out of the sale proceeds it would only be on the non residential portion and this may even be reduced further by the margin scheme. If you are registered for GST you can only claim this back if the margin scheme is not used but then of course if you are registered for GST you will have to charge GST on the non residential portion when you sell. Alternatively you would have to pay the GST back if you later de register for GST. The worst case scenario would be not being registered for GST when you buy so not claiming the input credits back but later registering for GST because you reach the $75,000 mark and then having to charge GST when you sell. The actual trigger is when your gross (before expenses) non residential rents exceed $75,000.
Section 23-5 of the GST Act states that if the annual turnover of supplies you make in the normal course of your business exceeds $75,000 you must register for GST. Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. The normal supplies of your business would be the rent you receive and the $75,000 test only applies to those supplies you make that are subject to GST ie not residential rent. The eventual sale of the premises by you would not contribute to the $75,000 test because it is the sale of a capital asset. Don’t forget to consider any other income the trust may have.
A very very important warning is to get further advice if the contract has a going concern clause, Going concern clauses are extremely dangerous. They mean that the purchaser does not qualify to claim back any GST on the purchase price but if they change the use or sell the property they may well have to pay the ATO another 10% of the purchase price even though they paid full market value. Generally a contract with a going concern clause should be for 10/11ths of the actual market value.
The short answer to your questions:
Is GST payable on purchase? If the seller is registered then they will have to remit part of the purchase price to the ATO in GST
That is, is it already included in the $1.3m? Should be but check the contract.
Is GST payable on the commercial premises only? Yes the price paid will need to be apportioned.
If the rental was $76k pa, does that trigger the requirement to register for GST? Yes
If the rental is $76k pa but outgoings reduce it to say, $74k, do I have to register for GST? Yes so maybe better to get the tenant to pay the outgoings and charge less rent
The rental on the units is approx. $40k pa. Is GST payable on this? NO
When I go to sell do I have to charge GST on both the shop and units, if on the same title or just the shop? Only the shop and only if you are registered for GST
Does the position change if all units and the shop are on separate titles? No
Does the situation change if the units were held for more than 5 years? The more than 5 years is relevant to the substantial renovation or building new units but that is a topic for another question or skype discussion.
This is a very complex area, you need to make sure you get professional advice from your accountant, who understands all your circumstances before you go ahead.