Commercial property transactions sit at the intersection of property law, contract law, and some of the most intricate GST provisions in the Australian system. Bookkeepers and accountants advising clients on property purchases, sales, or developments need to understand the going concern exemption, the margin scheme, the buyer withholding regime, and the input-taxed trap for residential conversions — because the GST cost of getting any one of these wrong can run into hundreds of thousands of dollars.
The Going Concern Exemption Under s.38-325
The sale of a business or commercial property as a going concern is GST-free if all four of the following conditions in s.38-325 of the GST Act are met:
- The vendor supplies everything necessary to continue the enterprise (assets, contracts, goodwill, records, equipment — whatever is required for the enterprise to function).
- The vendor carries on the enterprise until the day of supply (settlement) — the business must be operational, not wound down, at the point of transfer.
- Both parties are GST-registered (or are required to be registered).
- The parties have agreed in writing, before or at the time of the supply, that the supply is of a going concern.
The absence of any single condition voids the exemption. If, for example, the vendor decommissions the tenants before settlement or the purchaser is not GST-registered, the going concern treatment fails and GST is payable on the full sale price at settlement. This can create a cash shortfall that neither party anticipated if it is identified only at completion.
Going concern status is particularly relevant for the sale of commercial premises with a sitting tenant. The leased property, the lease agreement, and the deposit account for the bond must all transfer. A purchase of vacant commercial land, by contrast, is not a going concern — it is a taxable supply unless some other exemption applies.
GST Withholding on New Residential Premises (s.14-250 TAA 1953)
From 1 July 2018, a purchaser of new residential premises or potential residential land is required to withhold a portion of the purchase price and remit it directly to the ATO — rather than paying the entire price to the vendor. This regime was introduced following a series of phoenix arrangements where developers collected GST from purchasers and then dissolved before remitting to the ATO.
The withholding amount is:
- 1/11th of the contract price for most new residential premises and potential residential land.
- A special calculation applies where the vendor is using the margin scheme — in that case, 7% of the contract price is withheld as a proxy for the approximate GST margin component.
The vendor must provide the purchaser with a written notice before settlement specifying whether the withholding obligation applies and (if so) the amount and the ATO's payment reference number. The purchaser withholds the amount at settlement and pays it to the ATO. The vendor receives the net purchase price and then claims a credit (or offset) against the GST liability on the transaction when the BAS for that period is lodged.
Bookkeepers advising property developer clients need to track the withholding position across a development project. The developer will receive net settlement proceeds; the offset of withholding credits against GST payable must be managed in the BAS system.
The Margin Scheme Under Division 75
The margin scheme is available to eligible vendors who acquired the property before GST was implemented (pre-1 July 2000), or who acquired it by a supply that was not a taxable supply (for example, a GST-free going concern or under a margin scheme themselves). When the margin scheme applies, GST is calculated on the margin — the difference between the sale price and the acquisition cost or an approved market valuation at 1 July 2000 — rather than on the full sale price.
This is commercially significant for long-held property. A commercial building purchased for $500,000 pre-GST and sold for $2,000,000 today would attract GST of approximately $136,364 under the margin scheme (i.e., 1/11th of the $1,500,000 margin), rather than $181,818 on the full sale price. The saving is real and substantial.
The election to use the margin scheme must be agreed in writing by both parties before settlement. The purchaser cannot claim a full ITC on a margin scheme supply — the ITC is limited to the GST fraction of the margin scheme consideration, which is typically less than the full GST that would apply to a non-margin scheme sale.
Input Tax Credits on Commercial Property
A purchaser of commercial property who will use that property to make taxable supplies (for example, leasing to commercial tenants) can claim a full ITC on the GST paid at acquisition. This makes commercial property purchase structurally different from residential property purchase.
A purchaser who will use the property to make input-taxed supplies (residential long-term leasing) cannot claim the ITC. The GST paid on acquisition becomes part of the cost base of the property — deductible only on disposal for CGT purposes.
Mixed-use properties — a building with commercial tenants on the ground floor and residential apartments above — require apportionment. The ATO accepts a floor-area method or a revenue method, provided the method is reasonable and applied consistently.
The Residential Conversion Trap and Change-in-Use Rules
Developers who purchase commercial property and convert it to residential apartments face a specific GST trap. The conversion costs — demolition, construction, fit-out — are incurred to make a supply of new residential premises. The first sale of new residential premises is a taxable supply; however, if the developer then holds the property and rents it as long-term residential accommodation, that rental supply is input-taxed.
Where a developer claims ITCs on construction costs and then uses the completed property for input-taxed residential leasing rather than selling it, the change-in-use rules under Division 129 of the GST Act require a clawback of some or all of those ITCs. The clawback calculation compares the intended and actual use of the development at each adjustment period. Developers who switch strategy mid-project — from sell to hold — should model the ITC clawback before committing to the revised plan.
Practical Checklist Before Settlement
For any commercial property transaction, the bookkeeper should confirm:
- Whether both parties are GST-registered.
- Whether the going concern checklist (s.38-325) is fully satisfied — in writing.
- Whether the margin scheme election has been made in writing before settlement, if relevant.
- Whether the GST withholding obligation (s.14-250) applies, and whether the vendor notification has been issued.
- How the purchaser intends to use the property, and what ITC position follows from that use.
- Whether any change-in-use adjustment will arise in subsequent adjustment periods.
Commercial property GST errors are disproportionately expensive because they involve large transaction values and are typically identified by the ATO only on audit, by which time interest and penalties have accumulated. Upfront structuring is far less costly than remediation.