Selling real estate usually attracts 10% GST. However, a sale can be GST-free if it qualifies as a “sale of a going concern”. In essence, this occurs where the Vendor transfers a live, operating enterprise with everything necessary for the Purchaser to continue operating it immediately from settlement.
Requirements
Both parties must be GST-registered at the time of supply, the contract must expressly state that the supply is a going concern, the sale must be for consideration, and the Vendor must carry on the enterprise through settlement, active and operating up to and at the moment of completion, so the Purchaser can step straight in and continue it. In practice, this requires the relevant sales contract to be sold “subject to” existing leases, which remain on foot at settlement.
What Is an Enterprise?
An enterprise is any organised activity carried on for business or commercial purposes. It includes:
- Running a business (e.g. leasing out property or selling goods and services).
- Property development undertaken as a commercial project.
- One-off ventures done in the nature of trade (not merely holding an asset passively).
It does not include private or hobby activities, or merely owning an asset without active commercial use. For real estate transactions, the most common relevant enterprise is the leasing enterprise, that is, the ongoing business of leasing the property to tenants.
Commercial vs Residential Leasing
Commercial Property
If the property is leased and kept operating through to settlement, it can usually be sold GST-free as a going concern (if all requirements are met). This requires the real property itself, the leasing covenants and tenant relationships, and other items necessary for the continued operation of an enterprise (e.g. licences and permits) to be transferred with the sale.
Residential Property
Residential rents and sales of existing residential premises are input taxed. That means no GST is charged, but you generally cannot claim GST credits. The going concern concession usually is not used for purely residential leasing. New residential premises are typically taxable supplies and cannot be made GST-free just because there are residential tenants.
However, GST residential withholding (GST RW) may apply where the Vendor has developed the property for sale (even as a one-off) and the sale is made in the course or furtherance of an enterprise they carry on. Unless an exclusion applies, the Purchaser (individual or company) must withhold and remit the required amount to the ATO at settlement.
Mixed Leasing
Where a property includes both commercial and residential tenancies, different GST rules apply to each part. The commercial leasing component can usually be GST-free as a going concern if the requirements are met, while the residential component remains input taxed (no GST charged and no GST credits). The purchase price should be reasonably split between the commercial and residential parts and recorded in the contract.
The contract should also make clear that the going concern treatment applies only to the commercial part, that the residential part is input taxed, and should list what is being transferred for the commercial side together with how rents, outgoings and tenant securities will be adjusted at settlement.
Residential GST withholding does not apply to a genuinely GST-free going concern. However, if any part is taxable, Purchaser withholding may be required for that portion.
When GST Becomes Payable
GST will generally be payable if:
- The Purchaser is not GST-registered at settlement.
- The contract does not say in writing that it is a going concern.
- Not everything needed to keep the enterprise running is transferred (e.g. leases end before settlement, or key approvals and contracts cannot be assigned).
- The Vendor stops the enterprise before completion.
If that happens, the affected part of the deal becomes taxable, and 10% GST is added. The margin scheme does not apply to a GST-free supply.
How Can We Help?
At Gelder Peters Law, we can assess GST-free going concern eligibility, prepare fair contractual apportionments for mixed-use assets, draft robust GST and going concern provisions in sales contracts with safeguards, complete the requisite GST compliance checks and notices, and manage settlement end to end.
This is general information only and does not constitute legal advice. Laws and regulatory guidance may change, and their application may vary depending on the facts and jurisdictions. Whether a sale qualifies as a going concern depends on specific facts and tax settings. Independent accounting and financial advice should be obtained to confirm GST registration status, eligibility for going concern treatment, and any Purchaser withholding obligations.
