Commercial property has become an increasingly popular investment option in recent years, especially for self-managed super fund (SMSF) investors. While many of us feel comfortable investing in residential properties (as we are familiar with the purchase process) when it comes to investing in commercial properties the process can be more daunting and complex.
Are you considering investing in commercial property, but aren’t sure what’s at stake? Check out 5 common pitfalls to avoid from the experts at Dangerfield Exley Lawyers.
- Is GST Payable on the Property?
It depends! If you are purchasing a commercial property that is vacant and the contract states that the purchase price is “GST exclusive”, then you will pay an additional 10% GST on top of the purchase price stated in the contract. It is important to note that stamp duty is payable on the GST adjusted purchase amount. Your accountant may be able to assist you in obtaining GST tax credits after the settlement. Your solicitor should obtain a GST Tax Invoice from the vendor at settlement on your behalf for this purpose.
One common mistake vendor investors often make is not registering for GST when they are required to do so with the Australian Taxation Office (ATO), and then incorrectly addressing the GST issue within the contract. The vendor stands to lose 10% of the proceeds of the sale if this occurs. Conversely, if you are purchasing a commercial property that is tenanted, then it will be categorized as what is referred to as a ‘supply of a going concern’ and a GST-free transaction, subject to the purchaser being registered for GST. You should however always seek accounting advice on all key taxation issues, including GST.
Crucial tip: Both corporate entities and individuals can be required to be GST-registered.
- Understand the Terms of the Lease
The existence of a commercial lease, be it non-retail or retail, is a critical consideration when purchasing a commercial property. When reviewing a lease, consider the main elements, including but not limited to: the term of lease, options for further terms, the rental amount, the rent review method, landlord fit-out contribution and the rent-free period. You should also consider who is responsible for the payment of outgoings, and certain tailored special conditions such as a ‘first right of refusal’ clause, which allow a tenant the first right of negotiations to purchase the property..
Crucial tip: Have your proposed lease thoroughly reviewed before signing off.
- Statement of Adjustments
When preparing a pre-settlement Statement of Adjustments, ascertain if the security deposit is held by way of bank guarantee or a cash deposit. If the deposit is held by bank guarantee, you will need to obtain a new bank guarantee and Certificate of Currency (Insurance) noting the landlord’s interest. If the security deposit was provided in cash, then the vendor may have to allow the amount of security in the purchaser’s favour at settlement, if the property is self-managed. Rent and outgoings will also be adjusted, depending on whether the property is tenanted.
Crucial tip: A landlord is prohibited from recovering land tax payments from a tenant within a retail lease.
- Is the Property Worth $750,000 or More?
New Contracts of Sale dated from 1 July 2017 for the sale of all real estate worth $75,000 or more require the vendor to provide a ‘Clearance Certificate’ to the purchaser prior to settlement. While the aim of the Federal Government is to capture unpaid capital tax gains from foreign residents, failure to comply requires a purchaser to withhold 12.5% of the purchase price and pay this amount directly to the ATO at settlement.
Crucial tip: Have the Clearance Certificate provided to the purchaser prior to settlement.
- SMSF Compliance
If you’re considering using your SMSF entity to purchase a commercial property, ensure that you are fully compliant with all applicable superannuation laws and regulations. If you are financing your purchase, speak with your accountant and banker to ensure that your limited recourse borrowing arrangement is in line with your investment strategy. Also, ensure that you have the requisite trust deeds executed prior to the signing of any contract.
Crucial tip: Engage advisors experienced in SMSF transactions, for both legal and financial expertise.
For more information on purchasing commercial property, contact DE today for a full and frank discussion.
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