GST on commercial property
Commercial property transactions can attract GST, adding 15% to your costs if not handled correctly. The key is understanding when GST applies and how to structure the transaction.
When GST applies:
- Vendor is GST-registered and selling as part of their taxable activity
- Transaction is not zero-rated (going concern or compulsory zero-rating conditions not satisfied)
Going concern: If the property is sold with an existing tenancy as a going concern to a GST-registered purchaser, GST can be zero-rated. This requires specific conditions to be met.
Warning: Relying solely on "going concern" is often insufficient. Most commercial land transactions are now subject to the Compulsory Zero-Rating (CZR) regime, which must be correctly documented to avoid unexpected GST liabilities.
Compulsory zero-rating for land: Many commercial property sales must be zero-rated when both parties are GST-registered and the purchaser intends to use the land for taxable activity. This applies even without a tenancy or "going concern," so the agreement needs the correct GST statements and warranties.
GST traps to avoid
Common GST problems
- - Incorrect zero-rating: If the requirements for zero-rating aren't met, the vendor must pay 15% GST to IRD from the sale proceeds. On a $2 million purchase, that's $300,000 in GST. This can be catastrophic if not anticipated.
- - Late registration: A purchaser who isn't GST registered at settlement may need to pay GST then wait to register and claim it back - a significant cash flow impact.
- - Change of use: Buying for a taxable activity then using for exempt purposes can trigger GST clawback.
- - Associated persons: Transactions between related parties have additional GST rules that can be overlooked.
Settlement adjustments
At settlement, various outgoings are apportioned between vendor and purchaser:
Rent paid in advance is apportioned so purchaser receives credit for post-settlement rent
Rates, insurance, and other outgoings are apportioned to settlement date
Tenant bonds transfer to purchaser as new landlord
Body corporate funds and prepaid maintenance contracts
Pre-settlement requirements
Before settlement, you'll need:
- Finance confirmed: Unconditional approval and loan documents signed
- Insurance arranged: Cover from settlement date, not before
- Tenant notification: Letters advising tenants of ownership change and new payment details
- Key handover: All keys, codes, and security access arranged
What Carlile Dowling does
For GST and settlement, we:
- • Advise on GST treatment and zero-rating requirements
- • Ensure proper warranties and indemnities in the agreement
- • Coordinate with your accountant on GST registration timing
- • Prepare and verify settlement statement calculations
- • Handle tenant notifications and bond transfers