GST and the Sale of a Tenanted Commercial Property: What Every Buyer and Seller Should Know

The General Rule: Tenanted Commercial Properties Are Often GST-Free

In our experience, a sale of a commercial property with an ongoing lease in place will generally avoid GST, on the basis that the sale qualifies as a ‘supply of a going concern’. This is a significant financial benefit for both parties, but it is not automatic. The conditions must be met and the position should always be verified with each party’s accountant or tax adviser before contracts are exchanged.

What Is a ‘Supply of a Going Concern’?

Under the A New Tax System (Goods and Services Tax) Act 1999 (Cth), a supply of a going concern is GST-free. For a commercial property sale, this generally means the seller is transferring everything the buyer needs to carry on the leasing enterprise. That includes not just the property itself but anything else required for the lease to continue, such as equipment that must remain on site under the terms of the lease.

What Are the Technical Requirements?

The ATO sets out specific conditions that must generally all be satisfied:

• Both the seller and buyer must be registered for GST at the time of supply. The time of supply for a property contract is generally settlement. We typically advise clients to be registered by exchange to avoid any risk if complications arise.
• The contract must expressly state that the supply is of a going concern. This cannot be assumed from the circumstances.
• The seller must supply everything necessary for the buyer to carry on the leasing enterprise.
• The seller must carry on the leasing enterprise up to the day of settlement.

If any of these conditions are not met, the supply will generally be treated as taxable. This is why the drafting of the going concern clause matters as much as the factual circumstances,

and why you should have both your lawyer and accountant across the position before exchange.

What If the Tenant Vacates Before Settlement?

This is the question we hear most often. In our experience, if a tenant vacates or a lease expires before settlement, the going concern exemption will generally not apply. There is no longer an active leasing enterprise being carried on and supplied, which means GST will likely become payable on the purchase price. This is one reason why it is so important to ensure the GST clause in the contract is drafted correctly, so both parties understand who bears the GST liability if circumstances change between exchange and settlement.

Equally important is ensuring the lease itself is properly reviewed before exchange, and that the contract restricts the vendor’s ability to terminate or accept a surrender of the lease prior to settlement. This is a clause we always insist on for our commercial property purchaser clients – and one that is easy to overlook if you are not across the detail of commercial property contracts.

The Stamp Duty Saving Most People Overlook

If the going concern exemption applies, the GST saving is the obvious benefit. Less obvious is the flow-on effect for transfer duty. In NSW, QLD and VIC, stamp duty is calculated on the dutiable value of the property – which, where GST applies, means the GST-inclusive price. In practical terms, a buyer paying $3 million for a commercial property (or $3.3 million if GST is added) would pay approximately $16,500 more in NSW transfer duty on the higher figure, based on current rates. That gap grows significantly with asset value. The precise duty treatment should be confirmed with your lawyer and accountant for your specific transaction.

Why Getting the Contract Right Matters

A going concern clause that is absent, vague or incorrectly drafted can result in the ATO treating the supply as taxable regardless of the factual circumstances. Depending on how the contract is drafted, the GST liability can end up with either the seller or the buyer. An experienced commercial property lawyer will know what the clause needs to say, how to structure the due diligence process to confirm the conditions are met, and what steps to take if the position changes between exchange and settlement.

Practical Takeaways

• In our experience, a commercial property sale with an active lease in place will generally be GST-free as a supply of a going concern, subject to the conditions being met. Confirm the position with your accountant.
• Both parties must be registered for GST. We recommend being registered by exchange, not just by settlement.
• The contract must include a specific going concern clause. Without it, the exemption cannot apply regardless of the facts.
• If the tenant vacates before settlement, GST will generally become payable. Make sure the contract addresses this scenario clearly.
• The GST saving flows through to a lower stamp duty base in NSW, QLD and VIC.
• Get legal and accounting advice before exchanging contracts, not after.

Talk to Jaide Law Before You Exchange

With over 13 years of experience in commercial property transactions, Malisa and the Jaide Law team know what it takes to get these deals structured correctly from the start. If you are buying or selling a commercial property in Sydney or anywhere in NSW, QLD or VIC, book a complimentary property call with our team today.

Disclaimer We know most of you get this, but just to be clear, the information above is general and doesn’t consider your unique situation. Please don’t rely on it as a substitute for professional advice. We strongly encourage you to seek appropriate guidance for your specific needs.