Thinking of selling your leased apartment?
GST on rental apartments
Many people have bought apartments where the purchase included a lease to a management company, often with a guaranteed rental arrangement.
In many cases these apartments were sold as "going concerns" with the GST charged at 0%, or "zero-rated".
There are conditions attached to this type of apartment. You need to know what they are or you might get an unexpected GST bill when you sell your apartment.
Example - Bill and Marie
In 2006, Bill and Marie bought an apartment as an investment. The apartment was leased to a management company and was "zero-rated" as a going concern.
Bill and Marie signed a lease with the management company which set out conditions of use. They also signed some papers relating to GST.
When the lease ended, Bill and Marie decided to sell their apartment rather than negotiate another lease with the management company. Their daughter moved in on a casual basis while the apartment was on the market.
They were pleased to accept an offer of $255,000 which covered their mortgage, real estate fees and other expenses, and gave them a clear $20,000 profit.
But when Bill and Marie told their accountant about the sale, they were shocked to find they had a GST bill of $31,875 (12.5% of the sale price).
GST was payable because the apartment was no longer a going concern. The lease had ended and there'd been a change in the apartment's use.
If Bill and Marie had checked the GST status of their apartment before they sold it, they may have avoided a costly mistake.
Zero-rating
"Going concern" means the apartment is considered an active business. An apartment may be sold as a going concern if the sale includes a lease to a management company. The lease may provide a guaranteed income to the buyer over a set term.
These apartments are often marketed with statements like:
Note
If you comply with the conditions of the management agreement and are registered for GST, the purchase price of the apartment will be zero-rated.
GST zero-rated means the price is reduced because the GST is charged at 0%.
It sounds like a great idea - you don't have to pay GST on the purchase price and there's no hassle with tenants because the management company takes care of renting the apartment. You may also have a guaranteed source of income.
However, if you decide to sell your zero-rated apartment, or if you change your rental arrangement or the way the apartment is used, you may have to pay 12.5% GST and consider other tax issues.
Did I buy a zero-rated apartment?
An apartment can only be zero-rated if both the buyer and seller are GST-registered and the apartment is sold with a lease to a management company already in place.
When you bought your apartment, did you:
- sign a management agreement about renting it out?
- sign any papers about tax or GST?
If so, you could have been registered for GST and your apartment zero-rated.
What does this mean when I sell the apartment?
If you sell your GST zero-rated apartment with the original management agreement still in place, to a buyer who is also registered for GST, your apartment may still be a going concern. In this case you probably don't have to pay GST on the sale.
But, if you sell your apartment or have changed the way it's used, for example:
- the original management agreement has expired and you haven't negotiated another lease with the management company, or
- you or a member of your family moved into the apartment or you rented it to tenants directly,
you may have to pay GST.
What should I do?
We strongly recommend you check whether your apartment has been zero-rated for GST, and talk to a tax advisor and/or to us before you make a decision about selling your investment apartment or changing its use.
If you do plan to sell your apartment or change its use, you should also ask about other tax issues you may need to consider, including possibly cancelling your GST registration.
For more information call us on 0800 473 007 between 8am and 5pm weekdays.
Learn about
- GST
- Registering for GST
- Cancelling your GST registration
- Paying income tax on profits from property sales
Date published: 03 Mar 2009
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