Many people buy apartments with a lease to a management company included in the purchase. This lease often comes with a guaranteed rental arrangement.
This type of apartment comes with conditions. You need to know what these are to avoid an unexpected GST bill when you sell your apartment.
You could have been registered for GST and your apartment zero-rated, if when you bought your apartment you:
- signed a management agreement about renting it out
- signed any papers about tax or GST.
These apartments are often also sold as going concerns with the GST charged at 0%, or zero-rated.
Zero-rating and selling the apartment
You can sell an apartment as a going concern if the sale includes a lease to a management company. The sale can be zero-rated if both you and the buyer are GST registered.
You may have to pay GST if you sell your apartment and 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 yourself to tenants.
Example: Bill and Marie sell a leased apartment
In 2012, 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 is 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.