Commercial property transactions are one of the most GST-intensive areas of Australian tax practice. The rules differ significantly from residential property, and the consequences of getting the GST treatment wrong — on either side of a transaction — can be substantial.
The basic framework
Residential property:
- New residential premises: taxable supply (GST applies)
- Established residential premises: input-taxed supply (no GST, but also no ITC for the seller)
Commercial property:
- Commercial property is generally a taxable supply if the seller is GST-registered
- The buyer can claim an ITC if they are GST-registered and use the property in their business
This is the fundamental difference: commercial property in the hands of a registered entity attracts GST on sale, but the buyer (if registered) can recover it. The net GST cost is zero for a fully creditable acquisition.
The going concern exemption
A sale of a commercial property that includes an operating business (or a lease that constitutes an enterprise) may qualify as a supply of a going concern — which is GST-free.
For the going concern exemption to apply:
- All things necessary for the continued operation of the enterprise must be supplied
- The supplier must carry on the enterprise until the day of supply
- Both parties must be GST-registered
- The agreement must expressly state that the supply is of a going concern
The most common application: a property with a tenant and a lease agreement. If the seller transfers the property with the existing tenancy in place, this is typically a going concern sale — no GST.
The going concern exemption is frequently misapplied. The buyer and seller must both be GST-registered, and the written agreement must contain the going concern acknowledgment. Without the written statement, the exemption does not apply regardless of the underlying facts.
Long-term leases as taxable supplies
When a commercial landlord enters into a new lease, the ongoing lease payments are taxable supplies (GST-inclusive rent). The landlord remits 1/11th of the rent as GST. The tenant (if registered) claims an ITC.
For lease incentives (rent-free periods, fit-out contributions), the GST treatment depends on the nature of the incentive and whether it constitutes a separate supply by the tenant.
Input-taxed commercial property
Some commercial property activities are input-taxed:
- Residential rental income (including long-term accommodation)
- Some financial supplies embedded in property transactions
For a business with mixed supplies (partly commercial, partly residential), GST apportionment is required. The proportion of taxable vs. input-taxed supplies determines how much of the GST on expenses can be claimed as ITCs.
GST withholding for commercial property
Under the residential property GST withholding rules that came into effect in 2018, buyers of new residential premises are required to withhold the GST component and remit it directly to the ATO at settlement. This does not apply to commercial property — GST on commercial property flows through the vendor's BAS.
However, practitioners should confirm the nature of the property before settlement. A mixed-use development (residential and commercial components) can trigger withholding for the residential portion.
Stamp duty and GST interaction
Stamp duty is calculated on the total consideration including GST in most states. This means the buyer pays stamp duty on the GST component — which they may subsequently recover as an ITC. The net effect is that buyers pay stamp duty on an amount they can recover, creating a temporary cost.
Some states allow duty to be calculated on the GST-exclusive amount if an ITC is available. The rules differ by state — confirm with the relevant state revenue office for high-value transactions.
Bookkeeping for commercial property transactions
For a seller:
- Record the net sale proceeds (ex-GST) as proceeds from sale
- Record the GST component separately in the BAS liability account
- Remit GST through the BAS in the relevant period
For a buyer:
- Record the full acquisition cost including GST as the cost of the asset
- Simultaneously record the ITC claim in GST receivable
- The net asset cost equals the GST-exclusive acquisition cost
For ongoing commercial lease income:
- Record rent received inclusive of GST
- Post 1/11th to GST payable on each rent receipt
- Report at G1 (sales) on the BAS
Development activities
For property developers with commercial components, the GST treatment of development costs depends on whether the end product is taxable or input-taxed. A development intended for sale (taxable) generates full ITCs on development costs. A development intended for long-term lease (taxable supplies) also generates ITCs. A development intended for residential rental (input-taxed) does not generate ITCs on development costs.
Mixed-purpose developments require apportionment, typically based on the net lettable area or intended use percentage at the time costs are incurred.