GST, duty and the money mechanics

The cheque that settles a commercial purchase is bigger than the price tag, and one clause in the contract can move it by tens of thousands of dollars. Here is where the money actually goes.

Nobody warns residential investors about GST because residential barely touches it: rents and sales of existing homes are input taxed, GST free in effect, and the whole system stays out of sight. Commercial property is the opposite. The moment your fund buys premises, it steps into the GST system as a small business in its own right, and the settlement cheque, the rent invoices and the annual paperwork all change shape.

None of it is hard. All of it is expensive to learn by surprise. Raj learned it with a five figure phone call, so you can learn it here for the price of a chapter.

The fund becomes a taxpayer of a second kind

Leasing commercial property is an “enterprise” for GST purposes. If your fund’s annual commercial rent reaches $75,000, it must register for GST. Below that, registration is optional, and for a fund buying commercial property it is usually worth doing anyway, for one reason: only a registered fund can claim back the GST on the purchase and on ongoing expenses.

Registration brings obligations: adding 10 per cent GST to the rent (which your business tenant claims straight back, so nobody is worse off), lodging business activity statements, usually quarterly, and keeping the paperwork straight. Your accountant handles the mechanics for a modest fee. Budget for it and move on.

Buying, scenario one: the taxable supply

Rewind to Raj’s 2023 purchase. The vendor was a retiring owner occupier selling with vacant possession: no tenant, no lease, just an empty unit. That makes the sale a taxable supply, and GST applies on top of the price.

So the “$700,000” unit actually settled like this: $700,000 plus $70,000 GST, with transfer duty assessed on the GST inclusive $770,000. Raj’s fund, being registered, claimed the $70,000 back as an input tax credit on its next activity statement, and the refund landed about ten weeks after settlement.

Read that timing again, because it is the trap. The fund had to produce $70,000 of real cash on settlement day for money it would get back within the quarter. Lenders finance the property; they do not always finance the GST. Raj’s broker had flagged it early, so the fund held the cash and the settlement was boring, which is the only kind of settlement worth having. Funds that discover the gap in the week before settlement have been known to crash contracts over it.

The rule: on any purchase where GST is payable, your settlement plan needs a line item that says “GST bridge”, funded from the buffer, refunded by the BAS.

Buying, scenario two: the going concern

Now the better scenario, and the reason tenanted property has a hidden discount.

If the property is sold with the tenant and lease in place, the vendor is selling a running leasing enterprise, and the sale can be GST free as the supply of a going concern. Four conditions, all mandatory: both parties are registered for GST, the contract states in writing that the supply is of a going concern, the vendor supplies everything necessary for the enterprise to continue (the property and the lease), and the vendor carries the enterprise on until settlement.

Meet them all and no GST changes hands. No $70,000 cheque, no bridge, no waiting for the refund, and duty assessed on the lower GST free price. When Emma buys her tenanted unit in chapter 12, this is the clause doing the quiet work in her contract.

Two cautions. First, the exemption lives or dies on the contract wording, which is precisely why chapter 12 insists on a commercial property lawyer rather than a residential conveyancer; “we all knew what we meant” is not a recognised GST category. Second, the GST position you buy with has a memory: if the fund later flips the property’s use out of the GST system, adjustment rules can claw back the benefit. If your plans for the property involve anything creative, put the question to your adviser before settlement, not after.

The margin scheme: the credit that never comes

One more creature lives in commercial contracts, most often on newer property sold by developers: the margin scheme. Where the vendor applies it, they pay GST calculated on their margin rather than the full price, and the price to you is quoted inclusive with no tax invoice for the full GST.

Here is what matters to you as buyer: under the margin scheme you cannot claim an input tax credit. None. The GST embedded in the price is simply a cost. A $700,000 margin scheme purchase and a $700,000 plus GST taxable purchase can differ by $70,000 of recoverable cash, wearing near identical price tags. The contract must state the margin scheme applies, so the information is always there; the losses happen to people who do not know the sentence matters. Now you do.

Duty, briefly and honestly

Transfer duty is state based, changes often, and generally lands in the 4 to 6 per cent territory on commercial purchases, assessed on the GST inclusive price where GST applies. That interaction stings: on Raj’s purchase, duty applied to $770,000, so the GST pushed the duty bill up by a few thousand dollars that never came back with the credit.

I am deliberately not printing a duty table. It would be wrong in at least one state before this book’s next print run. The rule that does not date: get the duty number for your state, your price and your structure calculated fresh for every deal, including any concessions for moving your own business premises into your fund, and put the exact figure in your settlement plan. Appendix G has the prompt.

The rhythm of ownership: rent, BAS and outgoings

Once the fund owns the property, the money settles into a routine.

Rent: goes out as a monthly tax invoice: rent plus GST. Your tenant, if registered, claims the GST back, so the tax is a loop, not a cost, but the invoice must be right for the loop to work.

Activity statements: go in quarterly for most funds: GST collected on rent, minus GST paid on expenses like management fees, insurance and repairs, with the difference remitted or refunded. It is an hour of bookkeeping a quarter, usually bundled into your accountant’s fee.

Outgoings: run on an annual cycle under a net lease: the landlord estimates the year’s rates, insurance, land tax and other recoverables, the tenant pays instalments alongside rent, and the year closes with a reconciliation against actual costs. Retail leases add statutory disclosure and audit requirements to this cycle. It is the least glamorous paperwork in property, and doing it properly is a big part of why chapter 12 recommends a commercial managing agent for most funds.

Incentives: , if you offer them to land a tenant, have their own money logic: a fitout contribution is capital the fund must pay for (never the tenant related to you, as chapter 8 hammered) and can be depreciated; a rent free period pauses your income while the outgoings usually keep being covered by the tenant. Model the effective rent, not the face rent, when you are deciding what a deal is worth.

The settlement day checklist

Pull it together and a commercial settlement has more moving money than any residential one you have done. On the day, the fund needs: the balance of the deposit and price, the GST bridge if the supply is taxable, duty on the GST inclusive amount, legal and lender fees, and settlement adjustments for rent and outgoings already paid by the tenant, which on a tenanted purchase actually come back to you as a credit. And after all of it clears, the buffer from chapter 5 must still be intact, because the buffer was never part of the purchase money. It is the fund’s oxygen.

Appendix M carries the full document checklist, including the going concern clause, the tax invoice and the BAS registrations, so nothing on this page relies on your memory eleven months from now.

Find your sweet spot, or have the guts to walk away.