You may have GST to pay when you buy or sell an apartment that has or had a managed lease.
We recommend you get advice from a tax professional before you buy, sell or change the use of an apartment that has a managed lease.
What managed leased apartments are
People often buy apartments as investments, planning to rent them out. Sometimes these apartments come with a lease to a management company included in the purchase.
Generally, if an apartment has a lease to a management company at the time it’s bought, it’s likely to be considered a ‘going concern’, with GST charged at 0% (or ‘zero-rated’).
Read more about zero-rating and going concerns.
Was your apartment zero-rated when you bought it?
You may have bought the apartment as a going concern (with the purchase zero-rated) if both you and the seller were GST-registered.
For the purchase to have been treated as a going concern, you must have notified the seller before settlement of the purchase that:
- you intended to use the apartment to make taxable supplies in a taxable activity
- the property would continue to have a managed lease agreement.
Generally, you will have done this when you signed the agreement for sale and purchase.
What this means when you sell
You probably will not have a GST tax bill on the sale of your apartment if you are still GST-registered and the sale meets the requirements to be zero-rated. For example, the management lease is still in place and the buyer is GST-registered.
However, you may have to pay GST if any of the following apply.
- The original lease agreement expired, and you did not negotiate another one with the management company.
- You changed the way you used the apartment. For example, you or a member of your family moved into the apartment.
- You rented it out yourself to tenants for long-term rental.
In 2021, 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 setting out conditions of use with the management company. They also signed some papers relating to GST.
When the lease ended, they 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 accepted an offer of $455,000. This covered their mortgage, real estate fees and other expenses, and gave them a $40,000 profit.
When Bill and Marie told their accountant about the sale, they were shocked to find they had a GST bill of $59,347.83 (the GST component of the sale price, which included GST at 15%).
GST needed to be paid 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 an expensive mistake.